VIChallenge FIAT Akin to Ford Three Years Ago: Valuation AnalysisVW Staff
While Fiat S.p.A. (ADR) (OTCMKTS:FIATY) (BIT:F), as all other global automakers, operates in abysmal Europe, Fiat-Chrysler is actually less exposed to Europe (as a percent of company revenue) than is Ford Motor Company (NYSE:F). And while Fiat is headquartered in Italy, where the government appears increasingly likely to default in the absence of debt monetization by the ECB, there are some stark differences this time around that make Fiat more of a no-brainer than Ford was over three years ago.
An Easier Decision This Time Around (versus Ford in 2008):
1. Generating Cash:
You have resilient businesses that are contributing cash to new product investment and the despondent European operations, which will be restructured in 2013 (either the company will begin absorbing current under-utilized capacity by manufacturing additional Alfa Romeo models and Jeeps, or if labor certainty cannot be reached, there will likely be several plants shuttered). Ford did not have any resilient division helping offset North American weakness in 2009. Fiat is EBIT and EBITDA positive, (whereas Ford had negative EBITDA).
2. Superior Capital Allocators:
Fiat S.p.A. (ADR) (OTCMKTS:FIATY) (BIT:F)’s CEO, Sergio Marchionne, is perhaps the only auto CEO who understand show to rationally allocate capital. This can be proved numerically: Fiat’s share count has actually decreased by2% since 2006, vs. Ford’s increase of 113%. You can see him on 60 Minutes here, or deliver a great speech here.
3. No Hidden Liabilities:
There are no massive pension or healthcare liabilities on Fiat S.p.A. (ADR) (OTCMKTS:FIATY) (BIT:F)’s stand-alone balance sheet(thanks to Italy’s socialized medicine and generous state pensions). Chrysler’s current value is impeded by an under funded pension, but the rapidly growing operating profits should fully-fund this pension over the next few years.
4. Fiat Valuation:
Lastly, and most importantly, the current Adjusted EV/EBITDA (Adjusted EV= Market Cap + Net Auto Debt + Pension Underfunding) of 3.5x stand-alone and 2.7x on a proportional basis completely bakes in the negative working capital swings that come along with shrinking production volumes in Europe. Ford’sEV/EBITDA was negative back in 2009, not because the Enterprise Value (takeover valuation) was less than zero,but because EBITDA was negative. Fiat’s current valuation (see Table A) is bested only by bankruptcy-possible Peugeot.
H/T Curry Goat