Fiat Chrysler Offers Investors A Forward P/E Ratio Below 5

Summary

• P/E ratios of four to five times forward earnings next year.
• Analyst median price targets of roughly $24.00/share.
• Magneti Marelli spin off to happen late 2018 to early 2019.

Once upon a time, there was an automaker barely surviving during the great financial crisis. Plagued with high debt to equity levels and low sales during the Great Recession, it was hard to imagine that this automaker would be on the road to financial independence when Fiat acquired them in 2014. Financial ratios such as a trailing price to earnings didn't matter when a company was in serious doubts of staying solvent.

With the leadership of Sergio Marchionne, Chrysler's darkest days would be turned into some of its best days. There is no doubt that Sergio's vision of a debt-free FCAU (FCAU) and a core competence focused Jeep and Ram maker will be missed. I could write a whole article on just Sergio Marchionne and his financial acumen; however, this is Seeking Alpha, and we want to drive home the point of why FCAU is an interesting investment right now. Below, I want to detail key introductory financial ratios that give individual investors a great insight into how the company is doing.

Valuation Metrics For FCAU

Price to Earnings

The P/E ratio is everyone's quick gauge of what a company's trailing twelve months earnings is, and usually a culprit used by financial media to give us some type of an idea of what the stock is worth. The current P/E ratio of FCAU stands at 5.95.

FCAU data by YCharts

Forward Price to Earnings

This ratio is a little more useful to me, as it accounts for future earnings for a company and compares its earnings to the value of the business. It currently is standing at 4.05. Yes, you're reading that right. Compare this ratio to that of Tesla (TSLA), and it's hard to figure out why anyone wouldn't purchase shares in FCAU.

FCAU data by YCharts

Price to Earnings Growth

You always want a business that is growing, and better yet, you want to buy a growth stock at a reasonable price. The PEG ratio is currently standing at .18. A reading of under 1 is favorable to investors as you're buying a growth stock at more of a bargain.

FCAU data by YCharts

Price to Sales

Investors sometime overlook an interesting metric which is the price to sales ratio. It is calculated by dividing the company's market cap by the revenue in the most recent year; or, equivalently, divide the per share stock price by the per share revenue. A low P/S can also be effective in valuing growth stocks that have suffered a temporary setback. FCAU's ratio is currently reading .21.

Price to Book

Another quick and easy to use ratio is the price to book, which gives a macro overview of a firm without using a more complicated analysis tool like discounted cash flows. Price-to-book ratio = stock price ÷ [total assets - liabilities]. The reading of a P/B ratio is that lower values, especially below 1, are a signal to investors a stock may be undervalued. The higher the ratio such as 2 or more, indicates a company could be priced much higher than what its book value is. FCAU's current price to book stands at 1.06.

Analyst Ratings

I've never been one to pour over an analyst's rating and use it as gospel; however, there is one analyst report that stuck out to me in an article in Barron's. UBS analyst Patrick Hummel upgraded the FCAU shares to "buy" from "neutral", after the most recent earnings report last Wednesday. Mr. Hummel's 12-month price target of $27 reflects roughly a 58% upside and still offers a more conservative valuation compared to rivals like Ford (F), as reported by Barron's in, "Fiat Chrysler Still Has Lots of Gas in Its Tank," by, Jack Hough.

Mr. Hummel's UBS report noted various positive price performance drivers including a reduction in Chinese auto tariffs effective July 1, improving free cash flow, and continued demand for the recent Jeep Cherokee and Jeep Wrangler models. His report does a great job of highlighting the demand for new Jeep products and outlining the risks to his report being in recent tariffs causing economic slowdowns in the world economy.

According to CNNMoney, there are 22 analysts offering 12-month price forecasts for Fiat Chrysler Automobiles. They currently have a median target of 26.89, with a high estimate of 29.39 and a low estimate of 16.91. The median estimate represents a +58.39% increase from the last price of 16.98, which is very close to what Mr. Hummel is looking for.

Continued Merger and Acquisition Speculation

Off the top of my head, I can't think of any public company right now, which has more M&A rumors than FCAU. The late Sergio Marchionne was no slouch when it came to creating financial news headlines with his interest to merge with automakers such as General Motors (GM). With Mr. Marchionne's sudden passing, rumors are again being created of what will happen to FCAU. What we do know is the plan to separate the components business Magneti Marelli by late 2018 and potential plans in the future of spinning off its luxury brands like it did in 2016 with Ferrari (RACE).

FCAU data by YCharts

Sergio laid out a detailed five-year plan for the future of FCAU earlier this year, which included being debt free and focusing on its core brands such as Jeep and Ram trucks. Asian competitors have been reportedly interested in FCAU, with one of these companies being named as Hyundai (OTCPK:HYMLF) (OTCPK:HYMTF). Both parties have declined interest in one another, but it seems to me that FCAU is still up for sale.

Compared to other automakers in its industry, it's hard to understand why one of the fastest growing brands in Jeep and Ram trucks would be selling at a multiple of four to five its forward earnings. We will all miss Sergio Marchionne's leadership, however, it's time to recognize the great financial legacy he left shareholders. There is no doubt in my mind we will see consolidation to improve operating margins like Sergio wanted. FCAU now trading around $16.75 a share should create buyer interest again.

Disclosure: Some of Ortner Capital's clients own FCAU common stock and RACE common stock. Ortner Capital urges you to speak to a financial professional on your objectives, time horizon, and risk tolerance before acting on any investment. This article is of professional opinion of Mr. Josh Ortner, CTFA. Past performance does not guarantee future performance and returns.

Sources: Money.CNN.com, Finance.Yahoo.com, Barrons.com, Investopedia.com

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long FCAU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.