At the Geneva Auto Show in Switzerland, all the world automakers come to show off new products and where there company might be heading in the future. Fiat Chrysler (FCAU), continues to headline in the news with other competitors mentioning them in potential mergers. For the past two years, shareholders of FCAU have heard countless rumors about consolidation in the business from technology conglomerate Google (GOOGL), to automaker conglomerate General Motors (GM).
None of these rumors have seemed to be true, but one thing that seems to ring true is the rumors are still continuing today. I want to discuss the possibilities in this article of an actual merger of FCAU with another automaker by showing its recent financial ratios, and recent commentary as of today from Fiat Chrysler. Personally, I don't see anything happening in the near term, but, it is something to consider as Jeep is proving to be one of the fastest growing brands in the auto sector still.
French Automaker Peugeot Expresses Interest in FCAU, Again
The french automaker Peugeot has expressed interest in coming across the pond and gaining market share within the United States. According to Bloomberg today, Mike Manley, CEO of FCAU, was asked specifically if he had any interest in tying up FCAU with Peugeot. Mr. Manley was quoted specifically stating, "any deal that would make Fiat stronger." The Bloomberg article published today discusses that Peugeot has hired advisers to look at competitors, with FCAU being one of them. Whats interesting to me is that the french automaker has been named a couple times over the past few years in being an interested partner in FCAU. Only time will tell if this specific rumor will prove to be true.
More spin-offs for FCAU are highly doubted at the current time
During the show in Geneva today, Mike Manley was asked if he sees any spin off with the luxury brand Maserati, as we seen with the Ferrari brand (RACE). Mr. Manley responded very specifically in that he see's no spin off in the near-term of the brand, as FCAU wants to focus on this luxury brand. This was contradictory to me, as it has seemed that FCAU had been laser focused on shedding any brand that did not fit in its core brands such as Jeep, or Ram trucks. I would love to see Fiat Chrysler continue to maximize shareholder value with more spin-offs of brands that it is not making up a majority of its sales. The last spin off from the late Sergio Marchionne of Ferrari proved to be a big success for shareholders. Take a look at a chart below of Ferrari shares:
FCAU Valuations Could Make It Attractive to Other Automakers
I admittedly have wrote a few articles on FCAU lately, showcasing these unbelievable ratios. However, for those who are interested in all these potential merger rumors, this would be one of the most important factors to a buyer.
Source: Seeking Alpha
Besides the trailing P/E ratio at 5.34, and the forward P/E ratio under 5, you can see the price/sales ratio is at .17. Any price/earnings growth ratio of under 1 is also very attractive to any potential buyer, as you are buying growth at a discount. I am not an auto analyst, but, this stock's valuation seems way to low based on these ratios.
Valuations Compared to Competitors
When you look at the price/earnings ratios, you can see FCAU is at around 4.69 forward looking, compared to 5.95 with Ford Motor (F), or 7.23 with GM.
Fiat Chrysler is also trading at the lower price/sales ratio also compared to the other big three. If a company like Peugeot is looking to merge with a company that is selling at a low price/sales ratio, FCAU would fit that bill.
Balance Sheet Ratios
|Total Cash Per Share||9.63|
|Total Debt to Equity||58.81|
|Short Term Debt||6.70B|
|Long Term Debt||9.91B|
|Book Value Per Share||18.21|
|Debt/Free Cash Flow||3.33|
|Long Term Debt/Total Capital||0.37|
Source: Seeking Alpha
Another positive for FCAU is it cash position right now. According to Seeking Alpha, the total cash on hand is 14.94B, while its total debt is 16.61B. This makes the stock look more attractive to any investor who is worried about the company paying down its debt. I would like to see the current ratios higher and closer to 2, so that is a light concern as to how much short-term cash is on hand. The stock is also trading around a 15% discount to its book value which makes FCAU a value stock candidate.
At the end of the day, we can look at all the ratios we want that show FCAU is trading at lower multiples than pretty much all its peers, but forward sales and earnings is all that matters. Factoring in the potential for FCAU to merge, spin off another brand, and pay more special dividends, this stock looks too interesting to pass on. I have seen merger rumor after merger rumor happen with FCAU, but I believe something will eventually come true. However, I personally believe some more short-term financial engineering is on its way via more spin offs and focus on core brands then an outright sale or merger. Either way, FCAU is interesting to say the least with all the financial engineering options it has.
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.
Additional disclosure: Ortner Capital provides research and consultation to clients at its firm whom own FCAU common stock. These opinions are of Josh Ortner, CTFA, only. Please seek your own professional advice before making any decision on this article.