A time-tested approach to building a common stock portfolio suggests that we have core holdings -- stocks in which we have strong confidence, usually large-cap dividend payers -- but also a handful of shorter term positions in the speculative category. SA stock pickers will probably have other categories that suit their personal style. The stock in this article is well known, but not for its past success. It's an "Italian Job," in this case a car company that is not only speculative, it's also a turnaround situation: Fiat (OTCPK:FIATY).
A Quick Summary of a Few of Euroland's Positive Signs:
Starting with the underlying big picture, European car sales have just hit a 20-year low. This will look interesting to contrarians.
But there are some signs that Euroland is gradually improving its prospects, despite high unemployment/recession in southern Europe. Sentiment among Germans has recently improved. Mario Draghi has just said that the ECB will be willing to consider "unconventional" monetary strategies, by which I think he means priming the liquidity pump and de-emphasizing austerity. Christine Lagarde has expressed similar views from the IMF (although she seems to think we Americans are too profligate). These signs aren't earth shaking, but they're possibly helpful long term.
So What's the Deal with Fiat?
The new CEO is Sergio Marchionne, 61, a very savvy, hard working guy (he's been commuting between Italy and the USA almost weekly even before he became CEO in April 2012). He's recently been in touch with a few big European banks to talk about possible funding for his buying the other 41% of Chrysler that Fiat doesn't yet own. At the same time, the market has it figured that he'll probably end up doing an IPO because he said Fiat wouldn't take on any additional debt to buy Chrysler. He's not the kind of guy to fib, but regardless, Fiat is going to own Chrysler lock, stock and steering wheel one way or the other.
Chrysler is very important to Fiat's revenues because Fiat's sales in the USA would be zilch without it. Counting Chrysler, Fiat has ~10% of the car business in the USA and about that percentage in Canada, Turkey, Argentina and Mexico, ~3% in the U.K., France, Germany and Spain, ~20-25% of the Brazilian market and ~30% of the market in Italy. Fiat sells in 40 countries, but the others are minor in total volume. Only here is Chrysler a huge part of Fiat's business. I got this breakdown from an SA article by Mark Cianchetti, Dec. 13, 2012.
Fiat has five models of its basic 500 series. The cheapest goes for $16,000; the fully equipped and jazzed up version is about twice that. The 500e is the fully electric version (batteries underneath to save on scarce "cargo" space) and there is a hatchback. There are other cars but the various Fiat 500s will be the point products.
The market in Europe and Brazil is chiefly two car owners whose second car is a run-around-town. This puts a premium on required parking space and mileage (the basic 500 1.4L engine gets 31 mpg town, 40 highway). Over here, Fiat's market will be primarily for Dodge Dart, the Ram pickup and the Jeep SUV.
Let's look at a few metrics.
The Enterprise Value/Market Cap ratio is $23B/$9.25B=2.4. This is far larger than you'll normally see, meaning the market cap is low, which implies the stock price is "too low" compared to Fiat's estimated net liquidation value. Typical of a turnaround speculation.
P/E = 31ttm, "going" to 14 (at current stock price). This looks great, but is probably unrealistic. Still, a drop to a P/Entm of even 25 would be pretty good and more realistic (ntm=next 12 months).
Fiat pays no dividend. Its revenue growth has been negative with the southern EU's recessionary climate (-24%/yr over past 5 years, but +8.4%/yr over the past 14 years, according to FAST).
Fiat has several metrics that look shaky and could be unreliable. Price/Sales is a bottom-of-the-barrel 0.09 (Yahoo! Finance), PEG is slightly negative and profit margin is 0.3% (closer to 5% for most car companies, 10% for VW). When you see stuff like this, the one good angle is that it probably wouldn't take much to greatly increase numbers coming off such small values.
Most other metrics look okay. Px/Book is 1.15, nice and low and thankfully more "normal looking," though it gives an overly positive impression. Current Ratio is 1.46, which makes Fiat's debt look manageable. And Operating Cash Flow/Revenues is $8.24B/$108B=7.6%, which is close to the typical range of 8-9%. This is mildly positive.
ROE is 11.3%, clearly low but not unexpected. Fiat's largest Italian plant is running at about 20% capacity, causing low Return ("R" in ROE). Shareholder Equity is low, too, but holds up better. The signal is that ROE isn't out of sight, so for a speculation this isn't too bad. It's probably heading higher next year.
A recent negative is that looking at inexpensively priced cars, Fiat had the second worst record of "problems per 100 cars", whatever that means, apparently some sort of blacklist for needed repairs/replacement parts due solely to normal use.
If you tend to stick with the "tried and true," you'll pass on Fiat. But it might make a sensible multi-year speculation for value contrarians. There is plenty of bad news to go around Europe and Fiat has its share and not yet growing market share. Still, the new CEO, Sergio Marchionne, has hit the ground running and seems to know exactly what he wants to do. I suspect he's forging success for Fiat and for very patient investors.
After all, Fiat has been around since 1899 through some brutal times in Europe. This current situation over there might turn out to be more manageable than most economists and others thought. If a European company is still around after the 20th century, it's got to have survival bias if nothing else. Competition is cut throat, of course, but I'm guessing Fiat is up to the challenge.