Under The Hood With Fiat Chrysler

The following originally appeared on Tatro Capital.

Sometimes boring is beautiful. Traders seem to be too caught up with either calling the top in the NASDAQ or finding the next NVIDIA Corporation NVDA that they miss great opportunities staring them straight in the face. Take Fiat Chrysler Automobiles NV FCAU for instance.

From a fundamental perspective, despite a recent run from around $5.00 this time last year, the company possesses around over $7.00 per share in cash and has a current book value of $10.21. Enterprise value, which is market cap, plus debt, less cash, or what it would basically cost someone to buy the company outright in real cash dollars is $14.04 per Bloomberg. The stock is currently trading around $10.50 per share, which means it is trading 33 percent below enterprise value and right in line with cash value.

Whenever something looks too good to be true, one has to ask, why? In a market environment when everything seems to be selling at a premium, why is Fiat Chrysler trading at such a steep discount? Typically, when this happens, while the company may be flush now, their income statement reveals such red ink that over time it is a forgone conclusion the cash will be depleted simply to stay alive.

Since 2013, FCAU has seen top-line revenue increase from 86M to 111M while diluted EPS has risen from $0.74 to $1.18. Over the same time the company has knocked down long term debt from over 30M to 16M with the only cause of concern being a current liability increase from 26M in 2013 to almost 50M in 2016. I'm guessing a deeper dive into this increase would be a result of the short term financing of operations to meet an uptick in production demands.

As long as the short term debt continues to correlate with an increase in revenue, I would be comfortable however the moment we see a disconnect there it may be time to revisit the idea.  In addition to selling below intrinsic value, the company is selling at a forward times multiple of under 5, while the company EPS is estimated to grow over 15 percent in 2017 and almost 20 percent in 2018. In summary, this stock is definitely fundamentally attractive.

While promising, the fundamental argument is not enough for me. Before I put hard  earned dollars into an idea I want to be certain it is being supported by other traders and has enough demand to push the stock higher. For the last several years, legendary value investor Monshi Pabrai has held a significant position in FCAU waiting for other traders to catch on to his conviction regarding the mispriced stock. According to GuruFocus.com at the quarter ending March 31st, FCAU represented a 36 percent in Pabrai's portfolio, which is almost 13M shares. See his portfolio HERE. 

While the early bird gets the worm, I've always preferred to be the second mouse, as I don't have the patience Mr. Pabrai has to sit and wait while a stock meanders or even falls. I will always view the technical picture to tell me when the risk reward is ideal to ensure a better chance of success with a trade. After the last several years, FCAU is  now in a much better spot for entry.

As the chart shows, the stock was listed in late 2014 and quickly ran from around the $5.00 IPO price to a high of around $11. It spent the better part of 2015 bouncing around in this area until it finally lost support and retraced all the way back to the IPO start. My guess is that this correlated with lock ups expiring and insiders cashing out. After meandering around near lows throughout 2016 the stock has now found its way back to that previous channel and looks poised for a break out soon. Click to enlarge chart. 

Ideally a breakout to new highs confirms this thesis however I would prefer to play this stock in anticipation of a breakout taking this recent pullback as the opportunity to start a position. The April low of $9.60 offers a decent level of support and an ideal area to place a stop. Because of the anticipatory nature of the trade I would start with a half position now and then add on a breakout confirmation.

I have no position here just yet but will be taking one soon and look forward to updating you on the progress.

At the time of this writing Tatro Capital does not hold a position in FCAU.