Cars for Sale.

I sold out of my Fiat Chrysler (NYSE: FCAU) position this week (not investment advice obviously).  I summarized my thinking in a response to a post by User DJETD1997 on the Corner of Berkshire & Fairfax  forum’s Fiat/Chrysler thread.  See below (edited for clarity):

His/Her post:

Hey all:

When I was a little kid, I can just barely remember Lee Iacocca & the K-Car & Mini-van turnaround of Chrysler.  Fast forward through the decades and Chrysler has always been kind of a “problem child”…HOWEVER, I think 3 things are radically different today:

1) The company is debt free…they may actually have a nice chunk of $$$$ in the bank in a few quarters…I don’t know if Chrysler has EVER been debt free?

2) After the bankruptcy, they shed most of the pension obligations.  Anybody have information/confirmation of this?

3) They are making money, and making a TON of it.  Hard to gauge the P/E, but it is something 4 or 5 going forward.  I don’t know if Chrysler has ever traded at this low of a P/E.

So if you look at these 3 items, it looks like Chrysler may be in a position it has NEVER been in before.  Thus, this time it really might be different?

My response:

Very good points/questions.

1) This is the strongest part of the bull thesis IMO, Fiat Chrysler is net cash. That’s amazing!!! It is not like pre-08 where the chances of going back to go on the monopoly board were high. John Elkann is squarely focused on his family’s legacy and after the difficulties he went through in 04 and 08, he seems to be obsessed with not going bankrupt. But remember he has also separated the crown jewel (Ferrari) in order to further achieve this goal.

2) This is true, most of pension liabilities became equity ownership in Chrysler. Fiat did have to inherit 5B Euros of pension liabilities when they closed the deal for the remainder of Chrysler in 2014. The current pension liability stands at about 10B Euros for the company as a whole. Very manageable.

3) On an earnings basis it looks really cheap but I was recently reading some Li Lu and this quote really stood out to me “I think the value of a long-term investment comes ultimately from the value that the business has created over its existence”. Basically how much cash is coming in and out of the business over its existence. Like I said on twitter we seem to do alot of mental gymnastics to avoid this basic fact (at least I do). I pulled up the cash flow statements from 2007 and noticed that only 5B Euros FCF had been produced by the operating businesses (Op Cash Flow minus Investing Cash Flows) from 2007-2017. 5B!!!! Now it is true that anytime during this period management could have stopped investing to meet increased demand (esp at Jeep/Ram) and it would have rained cash but they did not (probably wisely so in order to maintain market share and a larger FCF bounty in the future). The 2018-2022 plan has roughly the market cap worth of FCF (approx 20B Euros) coming out the business in the next 5 years.

So unless you have some high degree of certainty of how much free cash flow the equity holder will lay claim to post 2022 I think this one has to go into the too hard pile. Nobody can reasonably predict where we are in the cycle and I just read everything on and wow!!! I did not know just how much progress Google has made. Yes, I know FCA is Google’s partner but this technology is probably just going to be licensed to all the automakers. How does that play out?

Another interesting data point, over $20B of capital has gone into Tesla since inception and it still  bleeds money. Sergio (RIP) said the future will be electric & commoditized. What are the chances that FCA will spend less than Tesla ($20B) post 2022 in this commoditized and electric future to just keep up? I think its probably going to be more.

Anyway to answer your questions I think this time is both different (Bankruptcy risk extremely low) and very much the same (capex needs, cloudy future, stage in cycle, etc).

Btw, I am long this but have been really trying to stress test my thesis in the past few weeks and have been coming up with more questions than answers and to be honest that’s always a warning sign for me. This was one of the great post-08 investments after they got Chrysler for basically free but before Ferrari spinoff. But alot of people much smarter than me think otherwise so all thoughts welcome

Addendum: As I have spent most of the part year researching investments as my primary activity I am becoming more intellectually honest and “finding” myself as an investor, so to speak. In addition, I probably entered the Fiat/Chrysler position on the coattails of investors I respect. Subsequently as I have tried to own the position in my mind over the past year it seemed to be more out of my circle of competence than I initially assumed. Most of these investors are still long FCAU and still likely to be right on this. Not a problem, there are many ways to “skin” this investing cat. For those keeping count, the only position I have not backed out of yet since I started this blog is Google. I guess the title of that post is telling, 100 years .

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