Investeringskommentar, Richard Hilgert, 06/10/2015
No-moat-rated Fiat Chrysler stock may come under selling pressure the closer we get to an Oct. 7 11:59 p.m. strike deadline set by the United Auto Workers. Given the long-term nature of the Morningstar discounted cash flow valuation methodology, we estimate that a strike in the United States would have to last more than two weeks to change our EUR 20 fair value estimate by EUR 1. Even so,
with a possible Ferrari IPO road show launching, the stock has rallied 15% since Sept. 29, despite the news that on the same date, the UAW had voted by a significant margin to reject the tentative contract reached last month. The stock is currently trading in the 4-star range at slightly more than a 35% discount to our fair value estimate. If there is weakness in the shares arising from the UAW strike, we think long-term patient investors should consider owning Fiat Chrysler shares, especially if the 5-star range is reached at EUR 10 or lower.
In our opinion, union leadership did not effectively communicate the tentative agreement. UAW members were also cautioned against letting outside groups stir
them up because "no one else has to pay the price of a strike…no one else will lose a paycheck or a home." In our view, this implies that the blame for the failure to pass the first contract lies squarely at the feet of the UAW communications team and not that the tentative agreement was a bad deal for labor.
This year's contract negotiations had been uncharacteristically quiet. Previous contract years (except during the Great Recession) were marred by lambasting quotes in the media from union leadership to rally the membership. Auto
company negotiating teams and union leadership have appeared to be both professional and rational as talks have pressed on this year. Even so, here we stand with a strike deadline now looming. Perhaps Old Detroit has not been eradicated from the U.S. automotive industry culture after all.
Bulls Say
- Global expansion of Jeep, Maserati, and Alfa Romeo strengthens average revenue per unit and improves economies of scale.
- Leading share position in Brazil and presence in other developing markets enhances long-term potential top-line growth prospects despite the country's currently weak economic conditions.
- On a relative basis, Fiat Chrysler has one of the largest available liquidity positions of any auto manufacturer, alleviating high leverage concerns.
Bears Say
- The global auto industry suffers from overcapacity that increases pricing pressure, in turn limiting economic profits.
- Fiat Chrysler's workforce is highly unionized, a threat to profits if workers demand wage increases or refuse labor cuts.
- A high level of financial leverage, in the event of substantial volume downturn, would divert significant cash from reinvestment in the business to debt service.
