Fiat Chrysler Automobiles (FCA) - Long

Transcription

1 Fiat Chrysler Automobiles (FCA) - Long Sum-of-the-parts implies 102% upside in base case in millions of Euros, except per share amounts Price: EUR 5.90 FD Shares: 1,538.8 Market Cap: 9,079 Less: Cash & Short term investments (19,074) Plus: Total Debt 25,374 Plus: Unfunded Pension 5,100 Plus: Minority Interest 194 TEV 20,673.0 Book Value of Common Equity 16,575 Plus: Total Debt 25,374 Plus: Minority Interest 194 Plus: Pref. Equity 0 Total Capital 42,143.0 Excluding Chrysler Including Chrysler Revenue Including Ferrari 59,380 50,102 35,880 74,949 83,957 86,624 96, ,191 % Growth -16% -28% 12% 3% 11% 18% Revenue Excluding Ferrari 57,459 48,324 33,980 72,649 81,557 84,289 93, , , , , ,902 % Growth -16% -30% 12% 3% 11% 18% -7% 1% 1% 2% Adjusted EBIT Including Ferrari 3,362 1,058 1,112 2,392 3,541 3,521 3,766 5,267 % Sales 5.64% 2.11% 3.10% 3.19% 4.22% 4.06% 3.92% 4.65% Adjusted EBIT Excluding Ferrari 3, ,080 3,191 3,157 3,362 4,794 5,402 5,659 5,771 6,137 % Sales 5.08% 1.70% 2.38% 2.86% 3.91% 3.75% 3.59% 4.33% 5.27% 5.45% 5.51% 5.74% Maserati Revenue ,659 2,767 2,411 2,319 2,783 3,006 3,186 % Growth % 30.80% 0.34% 7.82% % 66.79% % -3.80% 20.00% 8.00% 6.00% Maserati Adjusted EBIT % Sales 2.46% 4.10% 6.80% 6.62% 6.39% 9.94% 4.36% 5.80% 6.50% 7.10% 8.00% Magneti Marelli Revenue 5,447 4,528 5,402 5,860 5,828 5,988 6,500 7,262 % Growth % 19.30% 8.48% -0.55% 2.75% 8.55% 11.72% Magneti Marelli Adjusted EBIT % Sales 0.55% 1.81% 3.09% 2.40% 2.77% 3.14% 4.42% Total shipments (000s) Including Ferrari 2,344 2,255 2,211 3,966 4,223 4,352 4,608 Total Shipments (000s) Excluding Ferrari 2,337 2,248 2,205 3,959 4,215 4,345 4,601 4,610 4,533 4,586 4,618 4,713-4% -2% ROIC 5.4% 1.7% 1.4% 3.8% 5.4% 5.93% 5.92% 8.54% Consensus WACC: ~9% Net Debt/EBITDA 1.6x 1.6x 0.8x 0.8x Total Debt/Equity 241% 246% 172% 151% Net Industrial Debt 6,646 7,654 6,000 5,500 1

2 Recommendation:... 3 Situation Overview & Investment Thesis:... 3 Business Overview:... 5 Segment Overview:... 7 Management s credibility has improved as it executes on Business Plan: Industry Overview: Margin of Safety: Valuation: Catalyst: Risks: Conclusion: Appendix & Sources:

3 Recommendation: Fiat Chrysler Automobiles (FCA) represents a contrarian opportunity to buy a good business at a great price price target of Euros; 102% upside and -19% potential downside price target of Euros; 127% upside and -20% potential downside. Basis of valuation is a sum-of-the-parts analysis using multiples based on comparable multiples in line with historical range of FCA s trading multiples and estimates. Multiple in-line with historical average is justified as FCA continues to grow and expand its margins. Situation Overview & Investment Thesis: Why does this opportunity exist? Bull vs. Bear: FCA has underperformed because it remains behind peers on key metrics such as product portfolio, rationalized platforms, cost base and balance sheet strengths. There are doubts of whether Sergio can hit 2018 guidance. o Lower North American margins and higher industrial net debt relative to GM and Ford have been the primary overhang on FCA s valuation. o Furthermore, fears of peak auto began in the beginning of 2016 as investors were worried that the U.S. auto market couldn t keep growing as it has in prior years. o Cyclicality and weakness of FCA compared to peers is overblown and has created much uncertainty around FCA, particularly in the short term. As FCA continues to realign production in NAFTA towards higher margin jeeps and trucks, NAFTA margins will become in line with competitors, helping FCA deleverage to a net industrial cash position by Even if the market is right and we are heading into a recession, much of this bad outcome is already priced into FCA s share price, providing a margin of safety. FCA is misunderstood by investors. FCA has improved operations, particularly in North America, compared to GM and Ford, yet still trades at a discount to its peers. FCA trades significantly below its breakup value and management has already demonstrated a willingness to create shareholder value by taking steps to unlock the hidden value of its assets with the spinoff of Ferrari. Other potential levers include the spinoff or sale of Maserati or the components division which has already received a buyout offer in This is a contrarian investment since many automotive experts believe that we are at the peak of the cycle. I argue later in this report that we are in mid-cycle for NAFTA, and even if we are at the peak of the cycle, much of the downside in already priced into FCA s stock price, providing a margin of safety. Event FCA Drawdown vs. Current YTD The Great Recession -71.7% -53.0% "Grexit" Eurozone Crisis -48.8% -53.0% With FCA trading at 1.8x TEV/EBITDA, and 3.7x TEV/EBIT, the market is not giving any credit for a successful execution of the 2018 Business Plan. Even partial success of the plan could generate substantial shareholder value. 3

4 The stock has traded roughly in this range since the beginning of the year, and I believe there is limited downside given the many levers Sergio has to create shareholder value and the fact that FCA s current YTD stock performance is almost as bad as it was during the Great Recession, indicating that many potential bad outcomes are already priced into FCA stock price, providing a margin of safety. FCA has best in class management that are owner managers. The CEO, Sergio Marchionne s stock ownership level is 51 times his base salary, compared to two times for typical market practice stock ownership levels. The Agnelli family, through Exor, own a 29.15% shareholding interest in the common stock. FCA is ahead of target to hit its 2018 Business Plan; part of the plan calls for a net industrial cash position, providing liquidity in a worst case scenario. As FCA is ahead of target to meet its 2018 Business Plan, it becomes more likely that Sergio will return capital to shareholders or create value in other ways. FCA Executive Directors are properly incentivized, with short term variable pay comprised of three equally-weighted metrics, Adjusted EBIT, Adjusted net profit, and Net industrial debt. All long-term equity rewards are based on achievements of business plan financial targets. 4

5 Limited downside due to potential spinoff or sale of Maserati and the components segment, which combined are worth over half the current market cap. Vehicle segment excluding Maserati alone is worth 24,316 million Euros in the base case, minimizing downside. Historically, buyout funds, Volkswagen and other players have expressed interest in Maserati and bids for the components business. Sale of the components business may be imminent because Sergio has stated that in the medium and long term it doesn t fit with FCA s core business. Furthermore, FCA has great brands that are taking share in key markets. o My recent channel checks with Maserati dealerships indicate strong and continued consumer interest towards Maserati, particularly Levante. For instance, Helfman Maserati, Maserati of Charleston, Jim Ellis Maserati and Bennett Maserati of Allentown have stated that the level of consumer interest has been good, that Maserati is viewed as an exotic and exclusive brand though some dealers have stated that Maserati is now seen as more attainable because consumers are becoming more educated about the brand through word of mouth and referrals. However, one dealership stated that many consumers try Maserati only after they have tried every other brand. Automobile industry is ripe for consolidation, particularly after Sergio s presentation entitled Confessions of a Capital Junkie, and FCA is poised to benefit. Sergio s presentation renewed debate about consolidation in the auto industry and sparked a round table discussion with prominent figures in the industry such as Bo Andersson, Arndt Ellinghorst, John Krafcik, Bob Lutz, Tim Manganello and Andy Palmer. Many of them agreed that consolidation made sense including Bob Lutz, a former GM Chairman, who stated that a combination of GM and FCA makes sense. GM, whom Sergio thinks is the best strategic fit for FCA, could pay up to Euros for FCA assuming a 50% cash 50% debt deal. Details provided under catalyst section below. Business Overview: FCA is an international automotive group engaged in designing, engineering, manufacturing, distributing and selling vehicles, components and production systems. FCA is the seventh largest automaker in the world based on total vehicle sales in 2015 with operations in approximately 40 countries. FCA sells their vehicles directly or through distributors and dealers in more than 150 countries. FCA designs, engineers, manufactures, distributes and sells vehicles for the mass market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram brands and the SRT performance vehicle designation. FCA supports their vehicle sales by after-sales services and parts worldwide using the Mopar brand for mass market vehicles. FCA makes available retail and dealer financing, leasing and rental services through their subsidiaries, 5

6 joint ventures and commercial arrangements. In addition, FCA designs, engineers, manufactures, distributes and sells luxury vehicles under the Maserati brand, which FCA supports with financial services provided to FCA s dealers and retail customers through their subsidiaries, joint ventures and commercial arrangements. FCA also operates in the components and production systems sectors under the Magneti Marelli, Teksid and Comau brands. 6

7 mates NAFTA Geographic Industrial EBIT Walks FY 2012 FY 2013 FY 2014 FY 2015 FY 2016e Starting 1,770 2,741 2,540 2,151 4,450 Volume & Mix ,129 1, Mix Pricing (86) Industrial Cost Savings (346) (1,456) (1,577) (342) (120) SG&A (107) (90) (29) (5) 17 Investments / FX / Other 97 (111) (323) Ending 2,741 2,540 2,151 4,450 4,956 Variable Margin on Volume 25% 25% 25% Pricing as % of Sales 1.1% 1.9% 0.8% 1.1% -0.1% Raw Materials as % of Sales LATAM Starting 1,385 1, (87) Volume & Mix 89 (111) (228) (344) (131) Mix 80 Pricing (91) Industrial Cost Savings (174) (257) (441) (216) 86 SG&A (86) (37) (29) (125) 55 Investments / FX / Other (91) (192) (12) Ending 1, (87) 19 Variable Margin on Volume 25% 25% 25% Pricing as % of Sales -0.8% 0.6% 4.4% 4.3% 0.5% Raw Materials as % of Sales APAC Starting Volume & Mix (344) (265) Mix Pricing 45 (79) (142) (126) 31 Industrial Cost Savings (60) (106) (54) (53) 39 SG&A (91) (72) (111) Change of JV Income (China) 66 Investments / FX / Other 55 (103) 21 (34) 28 Ending Volume ex China JVs (including China imports) Volume ex China JVs YoY Grow th % -32% -38% Implied Margin ex China JVs % -0.3% -3.8% Variable Margin on Volume 25% 15% 20% Pricing as % of Sales 1.4% -1.7% -2.3% -2.6% 0.9% Raw Materials as % of Sales EMEA Starting (897) (737) (520) (118) 208 Volume & Mix (484) Mix Pricing (196) (172) (85) 101 (92) Industrial Cost Savings (187) 49 SG&A (67) (91) (85) Investments / FX / Other 390 (26) Ending (738) (520) (118) Variable Margin on Volume 25% 25% 25% Pricing as % of Sales -1.1% -1.0% -0.5% 0.5% -0.4% Raw Materials as % of Sales Segment Overview: Activities are carried out through six reportable segments: four regional mass-market vehicle segments (NAFTA, LATAM, APAC and EMEA), Maserati, the global luxury brand segment, and a global Components segment. 7

8 % of Vehicle Segment Revenue Revenue NAFTA 52% 53% 55% 63% LATAM 13% 11% 9% 6% APAC 4% 5% 7% 4% EMEA 21% 20% 19% 18% Luxury and Performance Brands 3% 4% 6% 3% Components and Production Systems 10% 9% 9% 9% 1 % of Vehicle Segment EBIT EBIT NAFTA 73% 77% 59% 90% LATAM 30% 17% 8% -2% APAC 7% 11% 15% 1% EMEA -22% -17% -3% 4% Luxury and Performance Brands 12% 16% 19% 5% Components and Production Systems 5% 5% 8% 8% NAFTA: Includes mass-market vehicle sales for the U.S. (2.244 million units sold and 12.6% market share, in 2015), Canada (293 thousand units sold and 15.2% market share in 2015), Mexico and other (87 thousand units sold and 6.3% market share in 2015). U.S. automotive market sales have steadily improved after a sharp decline from 2007 to U.S. industry sales, including medium- and heavy-duty vehicles, increased from 10.6 million units in 2009 to 17.8 million units in 2015, an increase of approximately 68 percent. Both macroeconomic factors, such as growth in per capita disposable income and improved consumer confidence, and automotive specific factors, such as the increasing age of vehicles in operation, improved consumer access to affordably priced financing and higher prices of used vehicles, contributed to the strong recovery. FCA s vehicle sales and profitability in the NAFTA segment are generally weighted towards larger vehicles such as utility vehicles, trucks and vans, while overall industry sales in the NAFTA segment generally are more evenly weighted between smaller and larger vehicles. FCA s dependence within the NAFTA region on pickup trucks, larger utility vehicles and minivans is expected to increase further as FCA intends to shift production in that region 1 Revenue and EBIT do not include other activities and unallocated items & adjustments 8

9 away from compact and mid-size passenger cars. This favorable product mix change has and is expected to continue boosting margins. LATAM: Includes mass-market vehicle sales for Brazil (483 thousand units sold and 19.5% market share, in 2015), Argentina (74 thousand units sold and 11.9% market share in 2015), and other LATAM (27 thousand units sold and 2.7% market share in 2015). The automotive industry within which the LATAM segment operates decreased 20.7 percent from 2014, to 4.1 million vehicles (cars and light commercial vehicles) in 2015 reflecting continued macroeconomic weakness in the region with a decrease of 25.6 percent in Brazil and a decrease of 5 percent in Argentina. APAC: Includes vehicle sales for China (139 thousand units sold and 0.8% market share, in 2015), India (9 thousand units sold and 0.3% market share in 2015), Australia (35 thousand units sold and 3.1% market share in 2015), Japan (17 thousand units sold and 0.4% market share in 2015), and South Korea (7 thousand units sold and 0.4% market share in 2015). The automotive industry in the APAC segment has shown strong year-over-year growth. Industry sales in the five key markets (China, India, Japan, Australia and South Korea) where we compete increased from 16.1 million in 2009 to 28.2 million in 2015, a compound annual growth rate ( CAGR ) of approximately 10 percent. Industry demand increased 5 percent with growth in China (8 percent), India (8 percent), South Korea (11 percent), Australia (4 percent), offsetting a 10 percent decline in Japan. APAC segment represents a significant growth opportunity. 9

10 EMEA: Includes vehicle sales for Europe (217 thousand units sold and 11.3% market share, in 2015), and other EMEA (77 thousand units sold and market share in 2015 was not material). In 2015, there was an improvement in passenger car industry volumes in Europe (EU28+EFTA), with industry unit sales increasing 9.2 percent over the prior year to a total of 14.2 million, although still below the pre-crisis level of approximately 16 million units in As a result of production over-capacity, however, significant price competition among automotive OEMs continues to be a factor, particularly in the small and mid-size segments. Maserati: This is FCA s luxury vehicle brand. In 2015, 37% of its sales came from the U.S., 5% from Japan, 22% from China, and 22% from other countries. In 2015, a total of 31.5 thousand Maserati vehicles were sold to retail customers, a decrease of 4.1 percent compared to 2014, primarily due to decreased volumes of the Quattroporte resulting from weaker segment demand in the U.S. and China. Components: FCA sells components and production systems under Magneti Marelli, Comau, and Teksid. Components compromises production and sale of lighting components, body control units, suspensions, shock absorbers, electronic systems, and exhaust systems and activities in powertrain (engine and transmissions) components, engine control units, plastic molding components and in the after-market carried out under the Magneti Marelli brand name; cast iron components for engines, gearboxes, transmissions and suspension systems, and aluminum cylinder heads under the Teksid brand name; and design and production of industrial automation systems and related products for the automotive industry under the Comau brand name. 10

11 Management s credibility has improved as it executes on Business Plan: Industry Overview: According to Greenwood Investors, U.S. not at peak auto: The U.S. is not at peak-auto sales because we haven t seen any incentive activity outside of select sedans, particularly in the luxury space as Volkswagen is trying to offload Audis 11

12 in the wake of the diesel emissions scandal, and Mercedes and BMW still try to compete against each other for volumes titles. Given the dramatic shift, particularly in the baby-boomer generation, away from sedans to crossovers and small SUVs, factories that are able to churn out crossovers, trucks and SUVs are running flat-out. There is very little excess capacity in North America to pump out a significantly higher number of crossovers and SUVs without repurposing plants. Incentives wars don t begin when an industry is running at full capacity. They only begin as weaker players with excess capacity imagine that their competitors won t notice their heavier incentives and higher volumes. The one exception to the full capacity, argument is in the car segments, particularly in the compact and luxury space, where significant new products have been developed as every automaker has focused on raising margins through their own refreshed offering. If we population-adjust auto sales over the last multiple decades, we can see that the current industry selling levels are at a population-adjusted mid-cycle level. In the more immediate term, the U.S. is still catching up from pent-up demand created during the Great Recession, and this is without new homes sales having recovered. Construction activity, a long-time driver of truck sales, has been robust lately, but still relatively low compared to the previous decade. 12

13 Estimated Implicit Demand for 2015 is based on an estimation that years of lower net new drivers on the road has significantly rebounded in The rationale is that scrappage rates of vehicles are very low in the context of robust demand for new and used vehicles. Additionally, these incremental vehicle sales are not coming because of aggressive incentives activity or at the expense of used car sales. Pricing on used vehicles remains incredibly and surprisingly robust - another reason there haven t been any need for a significant increase in incentives activity among the OEMs. Automotive OEMs are able to benefit from economies of scale by leveraging their investments and activities on a global basis across brands and models. The automotive industry has also historically been highly cyclical, and to a greater extent than many industries, is impacted by changes in the general economic environment. In addition to having lower leverage and greater access to capital, larger OEMs that have a more 13

14 diversified revenue base across regions and products tend to be better positioned to withstand industry downturns and to benefit from industry growth. Most automotive OEMs produce vehicles for the mass market and some of them also produce vehicles for the luxury market. Vehicles in the mass market are typically intended to appeal to the largest number of consumers possible. Intense competition among manufacturers of mass market vehicles, particularly for non-premium brands, tends to compress margins, requiring significant volumes to be profitable. As a result, success is measured in part by vehicle unit sales relative to other automotive OEMs. Luxury vehicles on the other hand are designed to appeal to consumers with higher levels of disposable income, and can therefore more easily achieve much higher margins. This allows luxury vehicle OEMs to produce lower volumes, enhancing brand appeal and exclusivity, while maintaining profitability. In 2015, 87 million automobiles were sold around the world. Although China is the largest single automotive sales market with approximately 19 million passenger cars sold, the majority of automobile sales are still in the developed markets, including North America, Western Europe and Japan. Growth in other emerging markets has also played an increasingly important part in global automotive demand in recent years. Since 2009, manufacturers generally have worked to maintain a reduced reliance on pricing-related incentives as competitive tools in the North American market, while pricing pressure, under different forms, is still affecting sales in the European market since the inception of the financial crisis. Margin of Safety: Valuation: FCA is worth substantially more in parts than as a whole. o Management has already demonstrated a willingness to create shareholder value by taking steps to unlock the hidden value of its assets such as with the spinoff of Ferrari. Other potential levers include the spinoff or sale of Maserati and the components division which has already received a buyout offer in FCA has staying power because it s well capitalized and expected to be at a net industrial cash position by Furthermore, it has strong brands and a global diversified revenue stream across products, making it better able to wither industry downturns and benefit from industry growth. Valuing FCA using sum-of-the-parts. Vehicle segments, not including Maserati, provides most of the revenue and adjusted EBIT. Sales and margins are volatile due to cyclical nature of the automotive industry. However, FCA has global presence, and macroeconomic weakness in some regions are offset by continued economic strengths in other regions. Maserati, FCA s luxury vehicle brand, provides more stable revenue and adjusted EBIT and has higher margins. 14

15 The components section provide stable revenue and adjusted EBIT margins which is less cyclical than vehicle sales SOTP - Unit Economics Snapshot Vehicle Segments Bear Base Bull Shipments (000s) 4,177 4,573 4, Net Revenue 93, , , Adjusted EBIT 4,443 5,174 5,928 Adjusted EBIT % Sales 4.76% 5.09% 5.48% TEV/EBIT 3.2x 4.7x 5.3x TEV 14,217 24,316 31,417 As a % of current TEV 68% 116% 151% Per share Luxury vehicle Bear Base Bull Shipments (000s) Net Revenue 3,006 3,006 3, Adjusted EBIT Adjusted EBIT % Sales 5.88% 7.10% 9.93% TEV/EBIT 10.4x 11.9x 13.4x TEV 1,838 2,540 4,000 As a % of current TEV 9% 12% 19% Per share Components Bear Base Bull 2018 Net Revenue 9,845 10,099 10, Adjusted EBIT Adjusted EBIT % Sales 3.8% 3.8% 3.8% TEV/EBIT 8.1x 9.0x 10.0x TEV 3,012 3,454 3,913 As a % of current TEV 14% 17% 19% Per share Total TEV 19,067 30,309 39,330 Fair Equity Value 7,473 18,715 27,736 Implied Share Price Upside / Downside -19% 102% 199% Bear: avg. of lowest multiple over past 2 years and 25th percentile of comps, with 20% discount. Base: avg. of mid historical range and median. Bull: Avg. of average historical trading range for FCA with high end of comps. All multiples in line with FCA's trading multiples over past 2 years. Bear: trading multiple of peers with 20% discount. Base: average of bear and bull. Bull: median peer range $3bn TEV floor for components business based on PE bids in 2015, stepping it up by 1 turn for base and bull case 2 2 Comps for vehicle segment: Volkswagen AG, General Motors Company, Nissan Motor Co. Ltd., Ford Motor Co., Peugeot S.A. Comps for luxury segment: Daimler AG, BMW, Harley Davidson 15

16 2019 SOTP - Unit Economics Snapshot Vehicle Segments Bear Base Bull Shipments (000s) 3,866 4,602 4, Net Revenue 89, , , Adjusted EBIT 4,302 5,488 5,910 Adjusted EBIT % Sales 4.82% 5.37% 5.37% TEV/EBIT 3.2x 4.7x 5.3x TEV 13,937 26,070 31,560 As a % of current TEV 67% 125% 151% Per share Luxury vehicle Bear Base Bull Shipments (000s) Net Revenue 3,186 3,186 3, Adjusted EBIT Adjusted EBIT % Sales 7.06% 8.00% 9.93% TEV/EBIT 10.4x 11.9x 13.4x TEV 2,338 3,033 4,240 As a % of current TEV 11% 15% 20% Per share Components Bear Base Bull 2019 Net Revenue 9,845 10,301 10, Adjusted EBIT Adjusted EBIT % Sales 3.5% 3.8% 3.5% TEV/EBIT 8.1x 9.0x 10.0x TEV 2,774 3,542 3,713 As a % of current TEV 13% 17% 18% Per share Total TEV 19,049 32,645 39,512 Fair Equity Value 7,455 21,051 27,918 Implied Share Price Upside / Downside -20% 127% 201% Catalyst: Consolidation: The automotive industry is characterized by significant duplication in product development costs, much of which does not drive value as perceived by consumers. Sharing product development costs among manufacturers, preferably through consolidation, will enable automakers to improve their return on capital employed for product development and manufacturing and enhance utilization of tooling, machinery and equipment. Reduce the number of players in the industry and share the prohibitive costs of building greener and more intelligent cars. Sergio Marchionne is a proponent of M&A and alliances, and renewed discussion of consolidation in the industry in 2015 with his presentation: Confessions of a Capital Junkie. Sergio and John Elkann say a merger with GM would unlock $10 billion in synergies. 16

17 ($ in Millions, Except Per Share Amounts in Dollars as Stated) Management Estimates - Long-Term Synergies: % Synergies Amount Technology and product development 70% $ 7,000.0 Other opex opportunities 15% $ 1,500.0 Cross-selling 15% $ 1,500.0 Total Long-Term Synergies: $ 10,000.0 Projected Estimated Annual Synergies Units FY16 FY17 FY18 FY19 FY20 % Synergies Realized: % 0.0% 40.0% 60.0% 75.0% 100.0% Technology and product development $M $ - $ 2,800.0 $ 4,200.0 $ 5,250.0 $ 7,000.0 Other opex opportunities $ - $ $ $ 1,125.0 $ 1,500.0 Cross-selling $M , , Total Annual Synergies: $M $ - $ 4,000.0 $ 6,000.0 $ 7,500.0 $ 10,000.0 In year 2 and beyond, this deal is always accretive on a Pro-Forma and GAAP basis, even with one third of synergies being realized. GM, whom Sergio thinks is the best strategic fit for FCA, could pay up to Euros for FCA assuming a 50% cash 50% debt deal. The combined company would have healthy leverage and coverage ratios, even with 50% debt funding, and it would also pay off over 50% of the transaction debt over 5 years, using my financial projections for FCA and equity research projections for GM. Projected Combined Income Statement Units FY16 FY17 FY18 FY19 FY20 Earnings Per Share (EPS): $ / Share $ 5.18 $ 5.41 $ 4.57 $ 4.89 $ 4.81 Accretion / (Dilution) - $: $ / Share $ (0.61) $ 0.08 $ 0.69 $ 1.96 $ 2.76 Accretion / (Dilution) - %: % (10.5%) 1.6% 17.7% 67.1% 134.7% Pro-Forma Earnings Per Share (EPS): $ / Share $ 5.43 $ 5.67 $ 4.83 $ 5.14 $ 5.07 Pro-Forma Accretion / (Dilution) - $: $ / Share $ (0.35) $ 0.34 $ 0.94 $ 2.22 $ 3.02 Pro-Forma Accretion / (Dilution) - %: % (6.1%) 6.4% 24.3% 75.8% 147.2% 17

18 Sensitivity - Year 1 EPS Accretion / (Dilution) - Purchase Price per Share vs. % Debt Used: Premium Paid and Per Share Purchase Price: % Debt Used: $ % 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0% $ % $ (0.05) $ (0.01) $ 0.04 $ 0.09 $ 0.14 $ 0.19 $ 0.25 $ 0.30 $ % (0.14) (0.09) (0.03) % (0.23) (0.17) (0.11) (0.05) % (0.31) (0.25) (0.18) (0.12) (0.05) % (0.39) (0.32) (0.26) (0.19) (0.11) (0.04) % (0.47) (0.40) (0.33) (0.25) (0.18) (0.09) (0.01) % (0.54) (0.47) (0.40) (0.32) (0.24) (0.15) (0.06) % (0.62) (0.54) (0.47) (0.38) (0.30) (0.21) (0.11) (0.01) % (0.80) (0.72) (0.63) (0.54) (0.44) (0.34) (0.23) (0.12) 0.00 Projected Combined Co. - Key Metrics and Ratios Units FY16 FY17 FY18 FY19 FY20 Total Debt / EBITDA: x 2.1 x 1.6 x 1.4 x 1.0 x 0.8 x Net Debt / EBITDA: x 1.4 x 0.9 x 0.7 x 0.4 x 0.1 x EBITDA / Net Interest Expense: x 22.7 x 9.7 x 10.5 x 12.4 x 14.5 x Total Debt / Equity: x 1.1 x 0.8 x 0.6 x 0.4 x 0.3 x Total Debt / Capital: % 51.8% 44.0% 36.6% 28.7% 20.7% Net Debt / Equity: x 0.7 x 0.5 x 0.3 x 0.2 x 0.0 x Net Debt / Net Capital: % 41.6% 32.4% 23.5% 13.9% 4.1% Even if GM s cost of debt rises to 5%, from 4.6%, because of the additional issuance of debt, the transaction turns dilutive at between Euros and Euros per share. Given that other OEM s have leverage ratios closer to 5-6x, GM may even have room to use additional debt to fund a higher purchase price. Premium Paid and Per Share Purchase Price: Weighted Average Debt Interest Rate: $ % 4.6% 4.7% 4.8% 4.9% 5.0% 5.1% 5.2% 5.3% $ % $ 0.38 $ 0.36 $ 0.33 $ 0.31 $ 0.29 $ 0.27 $ 0.25 $ 0.23 $ % % % % % % (0.01) (0.04) % (0.00) (0.03) (0.05) (0.08) % (0.02) (0.04) (0.07) (0.09) (0.12) Management has indicated plans to deleverage to a net industrial cash position by Since they don t have any major deals in the pipeline, and with much of NAFTA realignment towards higher margin jeeps and trucks already completed, FCA may delever faster than expected. Historically, management has shown dedication to deleveraging, with a recent Moody s corporate credit rating upgrade in Q to Stable outlook, and the rating raised from B1 to Ba3, as well as rating raised to B1 from B2 on bonds issued or guaranteed by FCA. Potential spinoff of Magneti Marelli: It does 7,262 million Euros in revenue and 321 million Euros in EBIT. At a 10x multiple, would be worth 2.09 Euros a share. FCA trades at 5.9 Euros a share. In 2015, a group including a U.S. buyout fund offered $2.7bn for Magneti Marelli. Sergio rebuffed them saying he would sell Magneti Marelli for at least 3bn Euros, setting a floor on the components business of 3bn Euros. 18

19 Potential spinoff of luxury vehicle brand, Maserati: Already had successful spinoff of Ferrari. Maserati is now FCA s most exotic and exclusive brand. Morgan Stanley projects Maserati to do 3,639 million Euros in revenue and 255 Euros in EBIT in At an 11x multiple, it would be worth 1.66 Euros a share. FCA trades at 5.9 Euros a share. Continued strong operating performance that will meet or exceed the 2018 business plan: Sergio increased guidance on his 2018 business plan; one of the items was to have a net industrial cash position, which would give FCA more staying power and ability to wither an economic downturn in its major markets. Return capital to shareholders: FCA is at the tail end of an investment cycle, with capex trending meaningfully lower. The 2018 business plan calls for FCA to have a net industrial cash position by 2018, making it more likely for management to return capital to shareholders. Risks: Cyclicality and high operating leverage: The automotive industry is highly cyclical, and to a greater extent than many industries, is impacted by changes in the general economic environment. FCA is more global now and has a more diversified revenue base. FCA is on track to have a net industrial cash position by 2018 and FCA US has removed its ring-fencing, enabling free flow of capital within the Group and an increased syndicated RCF from 2.5bn Euros to 5bn Euros, increasing its liquidity. In addition to having lower leverage and greater access to capital, larger OEMs such as FCA that have a more diversified revenue base across regions and products tend to be better positioned to withstand industry downturns and to benefit from industry growth. FCA has high operating leverage, which makes earnings more sensitive to sales. For example, assuming constant pricing, mix and cost of sales per vehicle, that all results of 19

20 operations were attributable to vehicle shipments and that all other variables remain constant, a ten percent decrease in 2015 vehicle shipments would reduce Adjusted EBIT by approximately 29 percent for 2015, without considering actions and cost containment measures FCA may take in response to decreased vehicle sales. o If Adjusted EBIT were to decrease by 30% and shipments by 10%, compared to a decrease in shipments of -4% in 2009 and 2% in 2010, 2018 price target would be 7.3 Euros, providing 24% upside in the base case. 20

21 FCA appears to have lower operating leverage on average compared to its peers, given that it was able to maintain positive EBIT margins during the Great Recession while the average mainstream OEM was not. Competition: The automotive industry is highly competitive in terms of product quality, innovation, pricing, fuel economy, reliability, safety, customer service and financial services offered. Global vehicle production capacity significantly exceeds current demand and this overcapacity has intensified and may further intensify pricing pressures. Competitors may respond to these conditions by attempting to make their vehicles more attractive or less expensive to customers by adding vehicle enhancements, providing subsidized financing or leasing programs, or by reducing vehicle prices whether directly or by offering option package discounts, price rebates or other sales incentives in certain markets. In addition, manufacturers in countries that have lower production costs may choose to export lower-cost automobiles to more established markets. Autonomous vehicles: May displace incumbent automobile manufacturers, though unlikely. 21

22 This scenario is many years down the road. Manufacturing capacity of incumbents is very capital intensive and most companies that design autonomous vehicles will not want to replicate the manufacturing capacity of incumbents. Strategic alliances between incumbent automobile manufacturers and autonomous vehicle designers is more likely. For instance, Google recently partnered with FCA on autonomous cars. Highly unionized workforce: Fiat Chrysler's workforce is highly unionized, a threat to profits if workers demand wage increases or refuse labor cuts. Execution risk of the 2018 Business Plan: The CEO Sergio acts like an owner manager and is properly incentivized with a significant stake in the company. He also has a long history of working with the Agnelli family to turn around businesses. Rising Oil Prices: An increased focus on sales of SUVs and trucks could make the world's seventh-biggest automaker vulnerable to an oil price recovery. Conclusion: FCA offers investors a compelling asymmetric risk/reward ratio. Recommend a long position in FCA with 2018 price target of Euros; 102% upside and -19% potential downside price target of Euros; 127% upside and -20% potential downside using sum-of-the-parts analysis. FCA trades at a discount to its peers despite strong and improving operating performance, free cash flow generation, and being on track to have a net industrial cash position by I believe a reversion to the mean is likely to occur within the next couple of years as the company continues delivering strong operating performance and management begins to reward shareholders through dividends and buybacks. If this reversion doesn t happen, management has other levers to unlock value, such as spinning off or selling its components and luxury brands divisions. 22

23 Appendix & Sources: 23

24 24

25 Projected Combined Income Statement Units FY16 FY17 FY18 FY19 FY20 Acquirer - Revenue: $M $ 150,013.9 $ 148,866.2 $ 140,645.4 $ 131,967.9 $ 124,217.5 Target - Revenue: $M 112, , , , ,174.9 Revenue Synergies: $M , ,500.0 Total Revenue: $M 262, , , , ,892.4 Acquirer - Cost of Goods Sold: $M 128, , , , ,392.3 Target - Cost of Goods Sold: $M 95, , , , ,832.0 COGS Associated w/ Rev. Synergies: $M ,279.3 COGS Synergies: $M - (2,800.0) (4,200.0) (5,250.0) (7,000.0) Total COGS: $M 223, , , , ,503.6 Gross Profit: $M 38, , , , ,388.8 % Sales 14.7% 16.2% 16.4% 17.1% 17.2% Acquirer - SG&A Expense: $M 12, , , , ,428.0 Target - SG&A Expense: $M 7, , , , ,398.5 Acquirer - R&D/embedded in another line it$m Target - R&D: $M 3, , , , ,604.2 Acquirer - D&A: $M 5, , , , ,956.2 Target - D&A: 6, , , , ,911.0 Target - Other Operating Income 6, , , , ,757.5 Acquirer - Other Operating Income: $M 3, , , , ,193.7 OpEx Synergies: $M - (600.0) (900.0) (1,125.0) (1,500.0) Amortization of New Intangibles: $M Depreciation from PP&E Write-Up: $M Operating Income: $M 12, , , , ,080.5 % Sales 4.6% 5.4% 4.7% 4.9% 5.0% Acquired - Net Interest Inc. / (Expense): $M (189.0) (283.8) (270.0) (242.9) (235.5) Target - Net Interest Inc. / (Expense): $M Foregone Interest on Cash: $M (214.6) (214.6) (214.6) (214.6) (214.6) Interest Paid on New Debt Issued: $M (614.4) (2,364.5) (2,043.2) (1,699.4) (1,332.5) Interest Saved on Refinanced Debt: $M Amortization of Financing Fees: $M (80.1) (80.1) (80.1) (80.1) (80.1) Net Interest Income / (Expense): $M (1,098.1) (2,943.1) (2,608.0) (2,237.0) (1,862.8) Pre-Tax Income: $M 10, , , , ,217.7 Income Tax Provision: $M 2, , , , ,554.4 Net Income: $M 8, , , , ,663.3 Net (Income) Loss Attrib. to NCI: $M Net Income to Common: $M $ 8,221.4 $ 8,607.5 $ 7,236.8 $ 7,738.3 $ 7,663.3 Acquirer - Avg. Dil. Shares: M Shares 1, , , , , Shares Issued in Transaction: M Shares Total Diluted Shares: M Shares 1, , , , , Acquirer - Standalone EPS: $ / Share $ 5.79 $ 5.33 $ 3.88 $ 2.92 $ 2.05 Earnings Per Share (EPS): $ / Share $ 5.16 $ 5.40 $ 4.54 $ 4.86 $ 4.81 Accretion / (Dilution) - $: $ / Share $ (0.62) $ 0.07 $ 0.66 $ 1.93 $ 2.76 Accretion / (Dilution) - %: % (10.8%) 1.4% 17.0% 66.1% 134.6% Pro-Forma Earnings Per Share (EPS): $ / Share $ 5.42 $ 5.66 $ 4.80 $ 5.11 $ 5.07 Pro-Forma Accretion / (Dilution) - $: $ / Share $ (0.37) $ 0.33 $ 0.92 $ 2.19 $ 3.02 Pro-Forma Accretion / (Dilution) - %: % (6.4%) 6.2% 23.6% 74.9% 147.0% 25

26 Sources Greenwood investors for industry overview FCA presentations 26