ADW Capital’s Adam Wyden on Fiat Chrysler and Ferrari

Value Investor Insight – ADW Capital’s Adam Wyden: A High-Class Problem, December 30, 2017

  • As bull market continues to run, many value investors find their portfolios filled with highly appreciated stocks that present a bit of a dilemma
  • Companies and their shares are likely hitting or exceeding expectations, so it’s difficult to jump out now, especially when table-pounding alternatives may be scarce
  • Value investors – always worrying about what can go wrong – can get edgy sitting on large gains and feel compelled to take at least some money off the table
    • Admittedly, it’s a high-class problem to have
  • Shares of laundry-equipment company EnviroStar are up nearly 110% since the end of March 2017, Fiat Chrysler stock is up 63%, while its newly public spinoff, Ferrari, has increased 41%
    • “As I’ve gained experience, I’d say I’m increasingly trying to get into assets that I don’t have to sell. It’s much better to buy something that’s growing, run by people who allocate capital effectively and make decisions in real-time that are fully aligned with all shareholders. If you overpay by two multiple turns but the assets are growing and there are people allocating capital effectively, it’s just a timing issue around when you get paid. As Charlie Munger says, it’s not about the timing, it’s about getting it right. What kills you is not missing something by a year or two, it’s missing something completely and suffering a permanent capital loss”
    • “If you’re an investor in my fund would you want me to tell you I’m selling something like Fiat Chrysler that I know extremely well, that has best-in-class insider ownership and that has a stock I think can still at least double from here, because I want to take money off the table so I can invest in something else? You’re at such a structural disadvantage as an investor every time you sell something you know very well to go and buy something that you don’t know as well. If you think you can continue to compound your pre-tax dollar with people who are well aligned with you and your interests, the bar is extraordinarily high to sell”
  • With respect to Fiat Chrysler, Wyden contends that the impact of the company’s transformation has yet to be fully recognized by the market
    • Its 5-year strategic plan announced in 2014 has revamped the product mix away from low-margin small cars toward more lucrative sales of Jeep SUVs, Chrysler minivans and RAM trucks
    • Company in 2018 is poised to deliver on its plan which calls for generation of $5-$6 in EPS and FCF that would translate into a 30+% FCF yield on today’s equity
    • Has additional value levers to pull: management has made clear its intention to spin off its Magneti Marelli automotive-components business, which generates 8.5 billion euros in sales and is also likely to spin or merge its Maserati and Alfa Romeo units after their own strategic transformations are complete
    • Doing “caveman math,” Wyden believes those actions alone could unlock value worth the current market value of the entire company, leaving the Jeep, RAM, Chrysler and Dodge businesses as pure upside
    • Sees additional upside optionality from a potential play for the entire company by a larger global competitor like Volkswagen or GM
  • With Ferrari, his thesis that the company has erred too far on the side of limiting supply relative to burgeoning demand remains intact, and expects it going forward to respond by raising production levels, increasing prices and broadening the product line to include SUVs and additional “supercars” – all without the need for heavy incremental capital spending
    • Based on prices and volumes at which other ultra-luxury brands like Bentley and Lamborghini are selling their SUVs, he thinks a Ferrari SUV could generate $1.2 billion in revenue and close to $1 billion in annual EBITDA soon after launch
    • Also sees considerable potential in increasing sales of Ferrari-made engines to sister brands Maserati and Alfa Romeo
    • Even before some longer-term upsides kick in, at 20x multiple of EBITDA on the above-consensus $1.7 billion in EBITDA he thinks it can earn in 2018, shares would trade at around $180; still a cool 70% premium to today’s stock price
    • While Sergio Marchionne plans to step aside from Fiat Chrysler at the end of next year, would expect him to remain very actively involved with Ferrari

Image Source: Fiat Group’s World