Why You Should Buy Fiat Chrysler Automobiles NV (FCAU)?
Fiat Chrysler Automobiles NV (NYSE:FCAU) will soon spin-off Ferrari, the sports vehicle maker. Currently, shares are trading with the valuation of Ferrari. Given the automobile sector performance in the last five years it might be the right time to enter. The standalone valuation is bound to be better based on separate EPS and enterprise value.
Shares To Be In Great Demand
There is going to be the only small portion of shares of Ferrari which will be available if investors purchase the Fiat Chrysler Automobiles NV (NYSE:FCAU) shares now. The company indicated that its Ferrari IPO will have a maximum of 19 million shares for investors to compete. Initially, it will be approximately 17.2 million shares with an option for 1.8 million additional shares to meet excess demand. However, investors were not satisfied with the total 19 million shares to meet the demand. There are reports indicating that demand outstripped supply by as much as ten-fold. That suggests the appetite for the shares of the company.
Currently, Fiat Chrysler Automobiles NV (NYSE:FCAU) has a 90% stake in Ferrari with 10% stake held by Piero Ferrari, who is the son of the late founder, Enzo Ferrari. The company is planning to divest a maximum of 10% of its holding in the company through the IPO route. That means 80% of the current holdings would be distributed to the shareholders of the company at the start of the next year. It disclosed a price range of $45 – $52 a share. The demand for the shares suggests that the company might price it at the higher end. That would mean a valuation of $9.8 billion for Ferrari. This is higher by $3 billion than the calculation of Morningstar and might add Euro 5 – Euro 6 to its fair value estimation of Euro 20 for Fiat Chrysler Automobiles NV (NYSE:FCAU) shares.
Last Year Performance
Last year, Ferrari generated revenue of Euro 2.7 billion while its EBIT was Euro 389 million. The company managed its output very tightly though the company was cranking up production. The automaker was targeting 9,000 deliveries a year until the year 2019. That level should preserve exclusivity and increase its EBIT to approximately $1 billion.
A Barron’s article this weekended highlighted the fact that Ferrari shares could double in the next four years. That meant Fiat Chrysler Automobiles NV (NYSE:FCAU) would also stand to gain. The net industrial debt of Euro 8 billion would get dropped down to a minimum of Euro 1.6 billion once the spin-off of Ferrari is completed. The total company’s profit margins in North America advanced to 7.7% in the second quarter from 4.9% in the preceding year quarter. That can offer investors more confidence in the company’s five-year business plan. That included making inroads in the premium segment with Alfa Romeo and Maserati apart from turning Jeep into an international brand. The event should offer a five-year business plan.
For the year 2016, Fiat Chrysler Automobiles NV (NYSE:FCAU) is estimated to generate sales of Euro 116 billion in 2016 while projecting it Euro 110 billion for the current year. The company’s earnings are predicted to jump to Euro 1.88 a share next year from Euro 1.38 a share this year and Euro 0.89 achieved last year.
According to the founder of GreenWood Investors, Steven Wood, the fair value of Fiat Chrysler should be more than Euro 30 a share at the end of next year. He is a longtime shareholder and believes that the quality of the company has not been understood fully.
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