Market Cap (USD Mil) 12,356
52-Week High (USD) 12.50
52-Week Low (USD) 6.70
52-Week Total Return % 45.4
YTD Total Return % 22.4
Last Fiscal Year End 31 Dec 2013
5-Yr Forward Revenue CAGR % 3.8
5-Yr Forward EPS CAGR % 91.1
Price/Fair Value 0.53
2012 2013 2014(E) 2015(E)
Price/Earnings 10.4 83.0 22.1 8.3
EV/EBITDA 4.2 4.7 4.8 4.4
EV/EBIT 8.8 11.0 11.8 10.3
Free Cash Flow Yield % -24.6 1.1 -6.6 -14.1
Dividend Yield % 1.2 0.0 — —
2012 2013 2014(E) 2015(E)
Revenue 83,660 86,549 90,254 95,475
Revenue YoY % 41.1 3.5 4.3 5.8
EBIT 3,724 3,378 3,442 3,924
EBIT YoY % 60.5 -9.3 1.9 14.0
Net Income, Adjusted 601 123 563 1,495
Net Income YoY % 60.6 -79.5 357.8 165.7
Diluted EPS 0.49 0.10 0.46 1.22
Diluted EPS YoY % 63.3 -79.6 357.8 165.7
Free Cash Flow -960 2,743 -3,388 -222
Free Cash Flow YoY % -116.3 -385.7 -223.5 -93.4
FCA Refuses to Stay Down for the Count; Detailed Thoughts post-Conference
See Page 2 for the full Analyst Note from 09 May 2014
Richard Hilgert Senior Analyst
richard.hilgert@morningstar.com +1 (312) 696-6412
Research as of 09 May 2014 Estimates as of 28 Apr 2014 Pricing data through 21 May 2014 Rating updated as of 21 May 2014
Investment Thesis 12 Dec 2013
In our view, the market has unfairly discounted the intrinsic value of Fiat S.p.A. We believe there are substantial benefits to be derived from the Fiat and Chrysler combination. Greater scale can be achieved in components, platforms, and capacity. An array of brands reduces reliance on any one vehicle category. Greater scale across more geographic regions lowers the company’s costs and reduces Fiat's dependence on domestic (Italian) volume.
Nonetheless, we think that only investors who are willing to accept the risks of a highly leveraged turnaround situation in an extremely competitive, capital-intensive, cyclical industry should consider investing.
In total, the combined entity has eight brands that cater to nearly all customers (passenger and light commercial). The downside to more brands is higher marketing and distribution costs. Poor product execution results in look-a-like vehicles with only a grille badge to differentiate the brands. On the upside, a diversified portfolio composed of well-differentiated brands reduces exposure to any single vehicle segment and substantially increases economies of scale. The scale of the combined entity is 5 million-6 million vehicles, the sixth-largest car company in the world.
As a market leader in Brazil (23% share), Fiat will benefit from that country's rising middle class. However, the company was late to Russia, India, and China and will undoubtedly lag already-established competitors' market shares. Even so, we expect Fiat to participate in the above-industry-average growth in emerging-market demand. Jeep's re-entry into China will provide Fiat with a turbo boost to its share of the market.
While management views the group's parts-making operations as strategic to its auto-assembly operations, we believe that parts and systems manufacturing should be completely separate. Even though the economic environment ultimately drives demand for both original-equipment manufacturers and parts suppliers, the dynamics of the businesses are quite divergent. However, to management's credit, profitability and returns on Fiat's parts businesses are competitive with other major European auto suppliers.
Fiat S.p.A. makes automobiles (Fiat, Alfa-Romeo, Lancia, Abarth, Fiat Commercial, Ferrari, Maserati, and 58.5% ownership plus managerial control of Chrysler), automotive parts (Magneti Marelli and Teksid), and industrial robots (Comau).Heavy trucks (Iveco), farm equipment (Case New Holland), and construction equipment (CNH) were spun off as Fiat Industrial S.p.A. to Fiat S.p.A. shareholders, effective Jan. 3, 2011.
Profile Vital Statistics
Valuation Summary and Forecasts
Financial Summary and Forecasts
The primary analyst covering this company does not own its stock.
Currency amounts expressed with "$" are in U.S. dollars (USD) unless otherwise denoted.
Historical/forecast data sources are Morningstar Estimates and may reflect adjustments.
Analyst Note: We account for Financial Services on an Equity Basis, Our FVE includes Financial Services at 1.5x BV
(EUR Mil)
Contents
Investment Thesis Morningstar Analysis
Analyst Note
Valuation, Growth and Profitability Scenario Analysis
Economic Moat Moat Trend Bulls Say/Bears Say Credit Analysis
Financial Health Capital Structure Enterprise Risk Management & Ownership Analyst Note Archive Additional Information Morningstar Analyst Forecasts Comparable Company Analysis Methodology for Valuing Companies
Fiscal Year:
Fiscal Year:
1
2 6 6 7 8 10
11 11 13 14 15 - 23 27 29
Morningstar Analysis
FCA Refuses to Stay Down for the Count; Detailed Thoughts post-Conference 09 May 2014
For investors who are willing to accept the risks of a highly leveraged turnaround company doing business in the cyclical, very competitive, capital-intensive global automotive industry, we think no-moat 5-star rated Fiat Chrysler Automobiles (FCA) has been misunderstood and unfairly discounted. We agree with the bears that FCA has set extremely ambitious five-year objectives but the Street's brutal beating of the stock valuation is akin to watching Rocky Balboa take a right cross from Apollo Creed, hit the mat, and then expect the tenacious fighter to give up and stay down for the count. The Italian Stallion of Philadelphia was out matched, seemingly like the Italian Stallion of Turin, but both resolutely got back in the fight.
Similar to not envisioning how Rocky could survive such a beating, it was hard to imagine that Chrysler could get back up after the beating it took in 2009. Fast forward five years to 2014 and it's equally difficult to prognosticate how FCA will reach its final round (of the five year plan)--that being EUR 132 billion in revenue, approximately 7 million units, and EBITDA margin expansion by 320-400 basis points. In 2013, FCA reported revenue of EUR 87 billion on 4.4 million vehicles delivered, generating EBITDA of EUR 7.9 billion for a margin of 9.3%.
Our EUR 14 fair value includes assumptions that substantially discount management's five-year plan. We forecast FCA reaches EUR 104 billion in revenue, volume hits 5.3 million, and EBITDA margin expands to 11.3% in 2018. This represents a EUR 28 billion revenue deficit and a 120-200 basis point EBITDA margin short-fall compared to FCA's plan. However, our capital investment forecast at EUR 51 billion (capital expenditures, capitalized development, and R&D expense) is only EUR 4.0 billion lower than management's five year plan to spend EUR 55 billion. In our opinion, any downside volatility created by the skeptics represents an even better opportunity to own
the 5-star rated shares.
While management may not completely achieve all of its targets, we think FCA will take the overly cynical critics by surprise in an undeniable upset. The stock traded the day after the investor conference as though the market believes that management's new five-year strategy was to sell Ferraris with Fiat engines and to throw heritage-rich Jeep, Alfa Romeo, and Maserati on the junk-pile of history's discontinued brands. Despite FCA critics' skepticism, we expect the company to still be standing after the final bell, having given the champ the fight of his life.
In our opinion, given the focus on premium vehicle expansion, moderate penetration in the Chinese passenger vehicle market, and at least a partial recovery from a protracted decline in European new light vehicle demand, it's reasonable and prudent to expect that over the next five years FCA will achieve at least some operating improvement relative to last year's performance. However, the five year strategy is heavily weighted on the front-end with respect to cost and investment then back-end loaded on the product launch and revenue generation side. In 2016, the company expects to peak investment spending at roughly EUR 12.6 billion, including capital expenditures, capitalized development, and R&D expense.
FCA's total EUR 55 billion investment over the next five years will result in significantly improved economies of scale and a much more flexible manufacturing base, reducing capital investment for future product changeovers. Economies of scale will be realized from higher volume on fewer architectures and decreased parts families. FCA expects to reduce total architectures to 9 by the end of the five year plan from 12 in use during 2013. Currently, the company produces 48% of its volume on its four largest platforms, using eight distinct parts families. In contrast, by 2018, FCA plans to produce 70% of its volume on the four largest platforms, using only four distinct groups of parts.
Management confirmed for us that there will be three +1.0 million global architectures, as we had been expecting.
The company's manufacturing technology will be flexible enough to produce up to six distinct models on one assembly line. This impressively compares with most assembly lines throughout the industry today that have the capability to only produce three different models. However, management concedes that workers would fatigue much more quickly on lines that produce six models. The ideal would be no more than three models. The built-in line flexibility will enable faster, lower cost, model changeovers in the future, which reduces future capital investment.
Management made it perfectly clear that it has no intention whatsoever to sell Ferrari. The company's five year plan is to keep the brand exotic and ultra-exclusive, maintaining volume at 7,000 units per year. However, management conceded that it could see a case where up to 10,000 units would still be exclusive. At that level of output, we would expect the company to introduce another model into the stable, though there was no mention of an additional model in the Ferrari line-up. FCA said that a 10,000 unit year for
Ferrari would result in EBITDA of greater than EUR 1.0 billion, nearly EUR 400 million higher than the amount we have estimated as Ferrari's EBITDA potential.
FCA's five year strategy includes the global expansion of the Jeep brand from roughly 732,000 units in 2013 to 1.9 million Jeeps in 2018. The plan includes taking the brand from five models produced in four plants located in one country to having a portfolio of six nameplates produced from 10 plants in six countries. Globally, the segment is estimated by IHS Global Insight (industry forecasting firm) to grow at an annualized 6% rate through 2018 versus FCA's expectations of a 17% annualized growth rate for the Jeep brand.
Outside of the U.S., Jeeps will be produced in Brazil, China, India, and Italy. While the sixth country was not specifically disclosed in management's presentation, we opine that at least one Jeep model will be produced at the FCA plant in Poland. Having a production base locally in Brazil and China will eliminate the steep tariffs on imported Jeeps and enable more competitive pricing. While we are not particularly fond of the styling, the smaller size of the new B segment Jeep Renegade cross-over utility vehicle (CUV) would fit well in urbanized markets outside of the U.S. where infrastructure is limited, roadways are narrower, parking space is tight, and fuel more expensive.
China's growing sport utility vehicle SUV and CUV market (SUVs and CUVs collectively known as UVs) will be ideal for the Jeep brand. While IHS estimates annualized growth in the sedan segment of 5% through 2018, the firm forecasts the Chinese demand for UVs will grow at a 12% annual rate.
Renegade would be welcome in crowded Chinese cities;
Cherokee would do well as a more affordable off-road option in rural areas where infrastructure is undeveloped; while upper middle class and wealthier customers could afford to pay for the import-tariff-laden and more exclusive appeal of the Wrangler and Grand Cherokee.
The company just received government approval to build three Jeep models with Chinese partner Guangzhou Automobile Company (GAC). Additionally, Jeep intends to drop the Compass and the Patriot in 2016 while at the same time introducing a new C segment vehicle. Since FAC has approval to build three models in China, we think the new C segment vehicle will also be introduced to Chinese consumers.
In the Brazilian market, Jeep plans to grow 40% annually to approximately 200,000 units in 2018 from 27,000 Jeeps in 2013. At present, Brazilian tariffs make Jeep uncompetitive and unattainable for most of the population.
We think that adding production capacity and introducing the Jeep Renegade in the Brazilian market makes eminent sense. With a growing middle class, tight city streets, and an underdeveloped roadway system, Renegade has room to penetrate the utilities market in Brazil. Being produced locally eliminates tariffs and makes the vehicle affordable for many Brazilians.
In our view, FCA has a sound strategy for the global expansion of Jeep, manufacturing in multiple geographic locations. The price tag over the five year plan is a bargain at EUR 2.9 billion for 9 incremental production locations in five countries. The low investment required results from the use of already in-place brick and mortar and from FCA's use of common architectures and part families. However, we are concerned that the investment process could be drawn out past the five year plan due to FCA's limited resources from a highly levered balance sheet and constrained free cash flow owing to low volume on weak economies in Europe and Brazil, plus the need to invest in other brands like Alfa Romeo and Maserati.
The skeptics have had a field day with management's plans for Alfa Romeo. Admittedly, the lofty objectives for the brand
would leave anyone scratching their head. FCA said that it would invest a staggering EUR 5.0 billion in the brand, increase the product line-up from three models to seven, and expand the brand from 74,000 units primarily in Europe to globally selling an eye-popping 400,000 units in 2018.
Indeed, it would be an understatement to say that this is a tall order. However unlikely the target appears today, we cannot help but remember how effective management has been with the Chrysler turnaround. Also consider that the size of the premium market is what the 400,000 units should be compared to rather than to Alfa's historical sales volumes.
The Alfa Romeo envisioned by management would be vastly different than its current form. The new Alfa Romeo, while relying heavily on its storied racing heritage, will have nameplates in five market segments including two B segment entrants, one C, one D, two UVs and one specialty segment nameplate. Alfa currently sells the Mito A segment car, the Giulietta B segment car, and the 4C specialty segment roadster. With the broadened line-up of premium nameplates across multiple segments, the Alfa Romeo planned for 2018 would be nearly a full line premium car company like an Audi, BMW, or Mercedes-Benz--a tough bunch of competitors with an already well-established dealer body around the globe.
Even so, let's consider the volume of the three global premium brands and add in Porsche for good measure since Alfa does have a racing/sports car heritage. The 2013 combined global sales volume of these automakers was 5.0 million units, including China. Over the next five years, we have forecasted average global total vehicle sales growth of 5%. The premium side of the market has grown at a slightly higher pace than the mass-market has grown. But assuming only a 6% growth rate for the German premium brands (we have seen forecasts as high as 12%), the 2018 annual sales volume for the entire group would hit 6.7
Morningstar Analysis
million vehicles, a 1.7 million vehicle increase in the size of the premium market.
There is of course additional volume in the premium segment that is not contemplated in this exercise because the brands are not truly global players, e.g. Acura, Cadillac, Lexus, Lincoln, and Infiniti which are concentrated in North America and Japan (Cadillac also has a significant presence in China). The point is, with the growth potential of the premium market, it's conceivable that, at only 400,000 units out of an incremental 1.7 million for the market, there could be room for one more global entrant.
Again, the problem for FCA is not the potential for expanding a globally recognized, heritage rich brand like Alfa Romeo.
The issue will be the source of the funding necessary to spend EUR 5.0 billion to make the strategy successful.
Perhaps a clue was given in the presentation to analysts, where the chart showing the launches of the new nameplates in the various segments in which Alfa Romeo will compete had a header of '2016-2018'. There was only one nameplate that was to launch before then and that vehicle is slated to debut in 2015. This being the case, along with FCA's disclosure that the bulk of the spending for the five year plan will occur in 2016, most of the Alfa strategy will likely be funded during the part of the plan where management said free cash flow would be highest.
While higher cash flow from operations would improve the possibility that the company will be able to fund the strategy, the probability drops on the uncertainty of predicting global demand three to five years from now. If market recoveries in Europe and South America are not as robust as the company expects and if the global expansion of Jeep requires greater resources than expected or gets delayed on market conditions, then the Alfa plan will be at substantial risk of being postponed yet again. After all, no one saw--not management, not the investment community,
and not even the automotive forecasting firms--six straight years of decline in the European market in 2009 when FCA's previous five year plan was presented.
For the already established, regional brands including Fiat, Chrysler, and Dodge, FCA plans to hone their appeal and reduce their overlap where needed. In Europe, Fiat is best known for small, fuel efficient models. With the Abarth performance name and with plans to introduce electric versions, we think Fiat will be able to serve the high-volume, economical, price conscientious crowd and the folks who are willing to pay a little extra--but definitely not the premium market.
Chrysler and Dodge will further differentiate their brands.
Chrysler will be all about world class quality, design, craftsmanship, and innovation at a reasonable price. The model line-up will consist of compact cars, mid-size sedans, mid-size CUVs, full-size sedans, full-size CUVs, and minivans. Dodge will focus on performance technologies and attitude. While the brand will keep the Durango, it will drop minivans, vacating for Chrysler to be the sole point of the spear in the segment. This will undoubtedly result in lower sales for Dodge but we think it is strategically the right move to make to strengthen each of the brands for the long run.
We believe there may be potential for the three established brands in the emerging markets, something that was not discussed by management in their five year plan. Fiat has been the market leader in Brazil for 12 consecutive years and we believe the brand will continue to expand with that market's above global average growth potential.
Unfortunately, all three brands are exceedingly late to enter the Chinese market. Fiat now has a meager toe-hold with the launch of the Viaggio through JV partner GAC. Imports of Chrysler and Dodge vehicles have historically not produced any fruit. Even so, a growing middle class in both
Morningstar Analysis
countries will support smaller, economical, fuel efficient vehicles as well as compact and mid-size value oriented sedans.
We believe FCA's extremely ambitious 2018 targets for its organization are possible but being five-years away from the ultimate goal, it's tremendously difficult for us to say that full completion of the plan is probable. However, our EUR 14 fair value estimate does not rely on full completion of the plan in 2018. In fact, our revenue and profit assumptions are roughly 20% discounted compared to management's expectations for consolidated FCA financial results. We believe that the company does not need to 100%
achieve all of its targets for the five-year strategy to be deemed a success. While the Italian Stallion might not win the decision, he'll definitely be standing after the final bell.
Valuation, Growth and Profitability 12 Dec 2013 We use a 9.4% weighted average after-tax cost of capital to discount Fiat's future cash flows, resulting in our expected-case $19 fair value estimate. Fiat's revenue cyclicality, operating leverage, in conjunction with its financial leverage results in our very high systematic risk rating. Consequently, our cost of equity assumption is 14%.
Given the company’s highly leveraged balance sheet, we have assumed a 19% equity and 81% debt capital weighting. We also assumed a 12.5% cost of debt to adequately reflect the leverage risk. We tax-effect our weighted average cost of capital assuming a 33% long-run tax rate.
Our $19 fair value estimate also includes the assumptions that 2014 European new-vehicle demand will remain weak but possibly perk up just a bit in the second half, offset by flat passenger-car demand in the Brazilian market. In addition, cost savings from the Fiat-Chrysler integration should begin to emerge in 2014, masked by continued Italian operating losses, with substantially improved operating leverage building in 2015 and beyond.
As economic recovery continues in the United States and troughs in Europe through the first half of 2014, incremental unit volume will support more favorable operating leverage.
In addition, by the outlying years of our five-year explicit forecast period, we believe Fiat/Chrysler will be capable of achieving higher margins than the assumptions we use in our base case. Our base case reaches an 11.8% EBITDA margin in 2017 versus management's guidance for an EBITDA margin range of 11.7%-12.5% upon completing Fiat-Chrysler integration.
Even so, in our view, the upper end of management's EBITDA margin target is reasonable, given the historical results of the two companies, combined with substantial cost savings from consolidated purchasing, engineering, corporate functions, plus architecture and component sharing as well as manufacturing efficiencies. Given the stark contrast between our base revenue and EBITDA margin assumptions against management's revenue forecast and EBITDA margin target ranges for a fully integrated Fiat-Chrysler, the $19 fair value estimate generated by our discounted cash-flow model looks very realistic, bolstering our assessment that the market just doesn't get it--meaning that Fiat stock currently trades at a very compelling valuation.
Scenario Analysis
Our base-case fair value estimate of $19 per share assumes that sales demand remains weak in Europe because of the sovereign debt crisis and government austerity measures.
However, we think European demand will show nascent recovery in the second half of 2014. After declining by 9%
in 2012, we assume that Fiat's European revenue is roughly flat in 2013 and 2014.
Owing to the launch of the Jeep Cherokee and solid demand in the U.S., a 2% decline in Latin American revenue, plus the launch of Maserati vehicles, we estimate Fiat
Morningstar Analysis
consolidated 2013 revenue increases by 5%. With a recovery in European new-car demand just beginning, a full year of Maserati Ghibli production, a full year of Jeep Cherokee production, but flat Latin America revenue, and partially offset by a stronger euro, we estimate that consolidated revenue increases by an additional 2% in 2014.
With a hefty launch schedule and European recovery in full swing beginning in 2015, we estimate consolidated annual revenue of around 3% in the latter portion of our five-year forecast.
Because of the substantial capital expenditures required for operational integration, the conversion of capacity to premium vehicle production plus the preparations for several new product launches delayed until 2014 and into 2015, we estimate cash flow (cash from operations less capital expenditures and capital development) remains negative until 2016. We estimate free cash flow of EUR 1.7 billion and EUR 2.1 billion in 2016 and 2017, respectively, setting the stage for potential debt reduction.
In our worst-case scenario fair value estimate of $12 per share, we assume that European volume declines by 12%
and average revenue per vehicle dips 6% for a combined revenue drop of 17% in 2013. Even so, we think North American demand for Chrysler Group products will support a 9% year-over-year increase in Chrysler Group revenue (on an as-reported by Chrysler basis, in U.S. dollars). As a result, we estimate that full-year 2013 consolidated Fiat revenue declines by 2%. For the remainder of our five-year explicit forecast, we assume manufacturing revenue remains roughly flat in the EUR 80 billion range.
Fiat trading margin excluding Chrysler's contribution has managed to stay positive despite deplorable factory utilization rates in Italy, which we estimate to be around 40%, and despite Latin America being negatively affected by both a softer economy and a stronger euro. We estimate
a worst-case scenario consolidated trading margin of 3.3%
for 2013, expanding to 4.3% in 2014 with the full year of production for the Cherokee and the Ghibli. This translates into 2013 and 2014 EBITDA margins of 8.8% and 9.9%, respectively.
Our best-case scenario fair value estimate of $30 per share includes healthy production volumes across the globe, with the exception of Southern Europe. We optimistically estimate Fiat Europe volume annually increases 6% on average and average revenue per unit annually grows at a 1% rate. Consolidated revenue grows at annualized rate of 10% to EUR 124 billion by the end of our five-year forecast on strength in North America and Brazil but also a substantial recovery in Europe.
As production picks up on reinvigorated demand in all global regions under this scenario, we assume that operating leverage becomes more favorable because of Fiat's 2012 negotiated labor accords, capacity actions taken since 2011, and popularity of new models launched from facilities in Italy. Owing to operating leverage and our optimistic volume assumption for our best-case scenario, and the consolidation of Chrysler, we estimate 2013 and 2014 consolidated EBITDA at EUR 8.6 billion and EUR 10.7 billion, respectively. In 2014, our estimated EBITDA is about 3 times higher than the amount of EBITDA generated in 2010 when Chrysler was not consolidated. However, we view the likelihood of this scenario to be only 25%.
Economic Moat
In general, automotive manufacturers are no-moat companies that lack barriers to entry (other than substantial capital investment) and make products that are easily substitutable by consumers. Fiat is no exception. Even though the automobile is a modern-day engineering marvel that requires enormous engineering talent and organizational skill to design, develop, and bring to market,
Morningstar Analysis
a lack of barriers to entry is evidenced by global industry overcapacity of roughly 30 million units. Including Chrysler, Fiat, Ford, General Motors, and PSA Peugeot Citroen facility closures in North America and Europe from 2009 through 2014, total capacity reduction has only been around 3 million units. Most industry executives agree that overcapacity is the top problem facing manufacturers today and that the problem will only get worse, exacerbated by many manufacturers' new capacity plans in China and Mexico.
Hard-fought market share is won and temporary economic profits are achieved by three typical routes. First, automakers seek to introduce a radically new design that defines a new vehicle niche (Chrysler's introduction of the minivan in the 1980s). Second, original-equipment manufacturers race to be the first to market a dramatically differentiated technology (Toyota's introduction of the Prius hybrid earlier this decade). Finally, some firms consistently have the youngest portfolio of products through frequent new vehicle introductions and substantial redesigns. The Japanese in the 1980s and 1990s had a competitive advantage by cutting their time to market in half relative to other manufacturers. Fiat-Chrysler combined has launched approximately 15 new or redesigned models through 2011.
Even though Fiat enjoys premium pricing with its Ferrari and Maserati brands, competitors have been able to achieve the same perceived value among consumers. While these brands evoke images of wealth, luxury, and exotic street-legal racing machines, consumers of these products can switch to a competitor's product such as Lamborghini, Aston Martin, or Rolls-Royce. Also, these consumers have the wherewithal to simply add more cars to their own personal fleet of ultraluxury vehicles. In price-conscious, high-volume markets, fickle consumers can switch among competing brands, and quite often, they do. The latest fads, hottest styles, high-profile recalls, high dependability ratings from consumer publications, and utilitarian needs
can all factor into consumers' buying decisions.
For penny-pinching, educated shoppers, dependable transportation at an affordable price is all that's required, and it doesn't matter which manufacturer's vehicle they buy, just as long as it's the best deal they can find. In this instance, consumers can easily switch from Fiat to Volkswagen, Peugeot, Opel, or Toyota, then back again.
Other consumers view their vehicles as extensions of themselves and are willing to pay a premium for a machine that exudes a certain image. Fiat's Maserati brand might be a consideration for such a consumer, along with Audi, BMW, Lexus, Mercedes, or even Cadillac (which is enjoying resurgent popularity in the United States). However, Fiat does benefit from a sense of nationalism in its domestic market of Italy, just as Peugeot, SEAT, and Volkswagen do in their respective domestic markets of France, Spain, and Germany.
Fiat's captive auto-parts operations should also be considered no-moat businesses because of the intensely competitive nature of the automotive industry, the industry's cyclicality, pricing leverage exerted by external customers, and an inability to sustain returns throughout economic cycles. However, because of highly integrated and long-term customer ties, customers' steep switching costs, and moderately improving pricing power among OEM customers, some suppliers have succeeded in establishing economic moats, for example, Gentex and Johnson Controls.
Moat Trend
We see a high degree of difficulty for an automobile manufacturer to have anything more than a moderate and temporary competitive advantage. Many OEMs are investing heavily in new facilities, resulting in the growing potential for global excess capacity. We think this will eventually lead to intensified price pressure. Consequently,
Morningstar Analysis
we have assigned Fiat a negative moat trend rating. The company effectively competes in global markets but does not have any discernible, prominent competitive advantage other than individual brand images that currently resonate well with consumers in many regions of the world. However, consumers easily substitute automotive brands and, under inauspicious conditions, brands can quickly lose their luster (for example, Toyota's recalls in the United States during 2010 and 2011).
Given the highly competitive nature of the industry, manufacturers must consistently and frequently execute in design and development of both manufacturing processes and the vehicles that they produce. Fiat's tie-up with Chrysler broadens the product portfolio while increasing utilization of common architectures. With each company contributing vehicle architectures, the design and development of the rest of a vehicle should take relatively less time than if these vehicles were being developed completely from scratch. As a result, Fiat should be able to stretch its research-and-development budget plus achieve potentially substantial operating leverage and cost savings while rolling out numerous new models from 2013-16.
Bulls Say/Bears Say
Bulls Say Bears Say
3Fiat's alliance with Chrysler provides scale and purchasing power that it would otherwise struggle to achieve on its own.
3Leading share position in Brazil and presence in other developing markets enhances potential top-line growth prospects beyond that of Fiat's domestic market.
3On a relative basis, Fiat ex-Chrysler has one of the largest cash positions of any auto manufacturer, alleviating high leverage concerns.
3The global auto industry suffers from overcapacity that increases pricing pressure, in turn limiting economic profits.
3Fiat and Chrysler's work forces are highly unionized, a threat to profits if workers demand wage increases or refuse labor cuts.
3Fiat has a high level of financial leverage that, in the event of substantial volume downturn, would divert significant cash from reinvestment in the business to debt service.
2014(E) 2015(E) 2016(E) 2017(E) 2018(E) Cash and Equivalents (beginning of period) 19,239 16,756 16,697 16,878 17,063
Adjusted Available Cash Flow 3,125 1,776 2,078 2,066 2,057
Total Cash Available before Debt Service 22,364 18,532 18,775 18,944 19,120
Principal Payments -6,000 -4,100 -3,600 -5,200 -2,700
Interest Payments -1,705 -1,911 -1,983 -1,983 -1,910
Other Cash Obligations and Commitments -209 -219 -230 -242 -254
Total Cash Obligations and Commitments -7,914 -6,231 -5,814 -7,425 -4,864
EUR Millions
% of Commitments
Beginning Cash Balance 19,239 59.7
Sum of 5-Year Adjusted Free Cash Flow 11,101 34.4
Sum of Cash and 5-Year Cash Generation 30,340 94.1
Revolver Availability 3,044 9.4
Asset Adjusted Borrowings (Repayment) — —
Sum of Cash, 5-Year Cash Generation, Revolver and Adjustments 33,384 103.5
Sum of 5-Year Cash Commitments -32,248 —
FIATY Sector Universe
Business Risk 6
Cash Flow Cushion 7 — —
Solvency Score 9 — —
Distance to Default 8 — —
Credit Rating — — —
Five Year Adjusted Cash Flow Forecast (EUR Mil)
Credit Analysis
Cumulative Annual Cash Flow Cushion
Cash Flow Cushion Possible Liquidity Need
Adjusted Cash Flow Summary
Credit Rating Pillars Peer Group Comparison
Source: Morningstar Estimates
Note: Scoring is on a scale 1-10, 1 being Best, 10 being Worst
Financial Health & Capital Structure
Fiat's automotive business has significant financial leverage (long-term debt of approximately EUR 28 billion, including Chrysler) but this is offset by the company's substantial liquidity (EUR 20 billion). During the past five years, total adjusted debt/EBITDAR had been below 2.5 times, but on lower EBITDA and higher leverage in 2008 and 2009, the leverage ratio jumped to 2.9 times and 5.8 times, respectively. In 2009, consolidated financing activities generated over EUR 5 billion in cash, primarily from bonds issued by financial services and CNH. However, Fiat industrial operations (pre-spin-off, including automotive) generated cash from financing activities of roughly EUR 1.4 billion from a three-year syndicated credit facility and term loan.
At approximately EUR 10 billion, Fiat (excluding Chrysler) liquidity levels appear to be adequate to handle current obligations, but on the contingency of another economic shock from the European sovereign debt crisis, the company's cash hoard may dwindle to uncomfortably low levels. Falling back on a European syndicated credit facility for additional funding may be challenging if the crisis brings on sovereign debt problems that in turn lead to a European banking crisis.
Fiat's capital structure is fairly complex because of its 58.5%
ownership in Chrysler and due to its financial services group, which operates through joint ventures. The company consolidated its three common stock share classes into all ordinary common stock in 2012. Effective control of Fiat S.p.A. is held by the Agnelli family, which owns 30.5% of the outstanding stock through the family's holding company, Giovanni Agnelli e C. Sapaz. Excluding financial services, leverage has ranged between 35% and 55%, net of cash, during the last five years. Excluding cash, total debt/total capital has been in the 60% to 70% range.
Credit Analysis
Consolidated debt outstanding consists mostly of bonds (around 45%), bank borrowings (around 30%), and notes payable by Chrysler to the UAW VEBA and the Canadian health-care trust (around 20%). Debt maturities (excluding financial services) for the current year are high, at EUR 4.5 billion, but taper off to around EUR 3.0 billion per year in 2013-15, but we expect Fiat to be able to refinance current-year maturities to later years.
The company reached an agreement with the U.S.
Department of the Treasury in June 2011 to buy the government's 6% stake in Chrysler for $500 million. Fiat received an additional 5% upon the completion of a commitment that Chrysler would launch a new 40 mpg car in 2012 called the Dodge Dart. This brought Fiat's total ownership in Chrysler to 58.5%.
Fiat management continually has stressed that it intends to own 100% of Chrysler. We agree with the company that full ownership is the best way to ensure optimized global strategy, including the complete integration of all corporate functions, supply-chain management, engineering, operations, and distribution. We also believe that this will lead to access to lower-cost, more efficient capital markets (such as U.S.
credit markets and the New York Stock Exchange versus the Milan Stock Exchange).
In January 2013, Chrysler issued a statement saying that it had received a "registration demand" from the UAW VEBA requesting that the company file a registration statement with the SEC for issuance of shares equaling 16.6%
ownership in Chrysler. While the agreements that established the right for the UAW to make this request allowed for the VEBA to act as of Jan. 1, we think this request is more about negotiating leverage than it is about actually proceeding with an IPO. Fiat has stated its intentions to own all of Chrysler outright and has exercised three out of its six options to call stock from the VEBA. Fiat can call the stock
in increments that equate to an ownership stake of 3.32%, semi-annually, up to 40% of the VEBA's ownership interest.
VEBA must hold the ownership stake to allow Fiat to fully exercise all five of its call options effective from July 1, 2012 through June 30, 2016.
However, after Fiat exercised the first tranche of the call option in July 2012, the UAW-controlled VEBA disagreed with Fiat on the value of the 3.32% stake. Fiat said that according to an agreed-upon formula contained in the 2009 Operating Agreement, the price of the first option should be
$139.7 million. The UAW countered that the way it was interpreting the formula, the price for the 3.32% stake should be $342 million. Fiat filed a lawsuit with the Court of the Chancery of Delaware to resolve the parties' differences on the pricing formula. In July 2013, Fiat notified the employee VEBA trust that it was exercising its option for the third 3.32% ownership tranche. By Fiat's calculation, the tranche is worth $255 million based on its interpretation of the 2009 agreement governing the call option of the Chrysler stake.
In our opinion, the UAW has exercised its right for an IPO under the 2009 Operating Agreement to demand a registration so that it could present the court with a market value of the stock. We think that the likelihood that the UAW goes through with an actual IPO is low. The amount of equity ownership held at the VEBA, excluding Fiat's covered interest, amounts to 24.9%. Why would the UAW demand registration of a 16.6% stake, down to the decimal point equal to the amount of stock in Fiat's call option? If the VEBA wanted to hold onto a portion of the equity after an IPO, since it holds 24.9% outright, why not register 15% or 20%?
We believe the UAW wants to get a market valuation on Chrysler equity to be able to present to the Delaware court a market multiple for Chrysler, which it needs to complete its definition of the option price calculation from the 2009
Credit Analysis
Operating Agreement. Secondarily, the Chrysler IPO and the market valuation set by the investment bankers in the IPO process provide the UAW with leverage in negotiating a price for the entire 41.5% Chrysler stake with Fiat.
At the end of July 2013, the court issued a ruling in favor of Fiat. The court stopped short of telling the UAW how much it had to pay Fiat--only that the UAW was obligated by the 2009 Operating Agreement to honor the Fiat call options.
That leaves two alternatives: The UAW and Fiat negotiate an out-of-court settlement or the case goes to trial. In either case, we think Fiat becomes 100% owner of Chrysler by the middle of 2014, but we think the company would prefer an out-of-court settlement to a trial as the latter would mean additional costs that only result in a win for both sides' lawyers.
Enterprise Risk
Risks include an unexpected drop in global vehicle demand, an unfavorable shift in vehicle mix, execution risk of successfully and fully integrating Chrysler operations, difficulty in penetrating the U.S. market, government stock ownership, union stock ownership, and a unionized work force. In addition, if the EU sovereign debt crisis escalates into a severe credit crunch, consumers' ability to finance vehicle purchases may be severely constrained, potentially stifling European demand. U.S. penetration is integral to achieving greater scale. UAW VEBA 41.5% ownership of Chrysler could represent a significant hurdle to overcome for management if the agenda of the UAW differs from Fiat's strategic initiatives. Execution risk associated with Fiat's integration with Chrysler may be possible, but we see only a minimal probability. There's potential for a considerable amount of internal upheaval to be created when combining R&D, engineering, component suppliers, supply chain logistics, vehicle architectures, corporate functions, and rationalizing capacity. However, the Group has already successfully launched new models within 18 months of
Fiat's control--astoundingly impressive given most development times range between 18 and 36 months. While Fiat has had favorable union relations, a unionized work force can become onerous. CEO Sergio Marchionne was interviewed on Italian television and essentially said Fiat auto would be profitable were it not for its Italian factories, no doubt stirring animosity among Italian workforce leaders and government officials. Investors should be heartened by this comment because it indicates management will resist union pressure to coddle chronically unprofitable operations.
Name Position Shares Held Report Date* InsiderActivity
NA NA NA NA NA
Top Owners % of Shares
Held % of Fund Assets Change
(k) Portfolio Date
Comerica Foreign Equity CIT - Inst Class — 0.10 — 31 Mar 2014
BNY Mellon Intl Appreciation Fund — 0.22 — 31 Mar 2014
API Efficient Frontier Value Fund — 0.72 — 31 Mar 2014
AdvisorShares Madrona International ETF — 0.71 — 21 May 2014
DFA International Core Equity Portfolio — — — 28 Feb 2014
Concentrated Holders
Goodwood SMID Cap Discovery Fund — 1.81 -5 30 Nov 2013
API Efficient Frontier Value Fund — 0.72 — 31 Mar 2014
AdvisorShares Madrona International ETF — 0.71 — 21 May 2014
BNY Mellon Intl Appreciation Fund — 0.22 — 31 Mar 2014
Comerica Foreign Equity CIT - Inst Class — 0.10 — 31 Mar 2014
Top 5 Buyers % of Shares
Held % of Fund Assets
Shares Bought/
Sold (k) Portfolio Date
Aperio Group, LLC 0.02 0.04 40 31 Mar 2014
Columbia Management Investment Advisers, LLC — — 35 31 Mar 2014
Wellington Shields Capital Mgmt LLC — 0.04 20 31 Mar 2014
Parametric Portfolio Associates LLC 0.02 0.01 12 31 Mar 2014
Checchi Capital Fund Advisers, LLC — 0.07 1 28 Feb 2014
Top 5 Sellers
World Asset Management Inc 0.01 0.03 -17 31 Mar 2014
Goodwood Advisors, LLC — 1.81 -5 30 Nov 2013
Management 03 Dec 2012
Management & Ownership
Management Activity
Fund Ownership
Institutional Transactions
*Represents the date on which the owner’s name, position, and common shares held were reported by the holder or issuer.
Fiat is in effect controlled by the Agnelli family through the family's holding company, Giovanni Agnelli e C. Sapaz, which controls EXOR S.p.A., an investment company that owns about 30.5% of Fiat S.p.A. Under Italian securities regulations (CONSOB, Italian securities market regulator), shareholders who own at least 1% of ordinary shares may submit lists of candidates for election to the board of directors. The voting list system for the election of the board of directors was used for the first time at Fiat's general meeting in March 2009. EXOR has been the only shareholder to submit a list of candidates and, as such, all of the candidates on EXOR's list have been elected. John Elkann, Fiat's and EXOR's chairman, and Andrea Agnelli, a director on Fiat's and EXOR's board, are both grandsons of Gianni Agnelli, the great grandson of the founder of Fiat, Giovanni Agnelli.
Sergio Marchionne was appointed CEO of Fiat S.p.A., and Chrysler in 2004 and 2009, respectively. The dual responsibility is intended to enable integration of Fiat and Chrysler as well as facilitating day-to-day operations of the group as a single entity. Fiat's board is composed of 15 members elected in March 2011, whose terms last approximately two years and of whom, eight are considered independent. Although we prefer the board to consist of a larger portion of independent members, Fiat's structure isn't uncommon among international companies. Fiat annually publishes a corporate governance report, which includes copious amounts of policy information. Nevertheless, we would like to see the company provide additional disclosure on the financial metrics used to determine cash and stock option bonuses.
Analyst Notes
FCA Management Presents Ambitious Five-Year Plan and Naysayers React as We Expected 07 May 2014 No-moat rated Fiat Chrysler Automobile laid-out a five-year plan to the media, investment analysts, and other constituents in a well-attended, full day's worth of presentations. Management said it expects revenue to grow at an annualized rate of 9%, to EUR 132 billion in 2018 from EUR 87 billion reported for the full year 2013. The company also forecast a 320- to 400-basis-point expansion in EBITDA margin over the course of its five-year plan, to a range of 12.5%-13.3% in 2018 from 9.3% last year. Reporting first- quarter 2014 results that were in line with our expectations, management also maintained 2014 guidance.
While FCA's assumptions include reasonable demand expectations for each of its global markets, they also include ambitious targets for Alfa Romeo and Maserati volume to increase roughly four and five times, respectively, as the marques are expanded to capitalize on their globally well- recognized brand names. As we predicted in our April 29 FCA note, the naysayers found management's ambitious plans dubious, questioning the company's ability to execute global expansion on cash flow that is restricted by high debt service and losses in Europe.
While certainly ambitious, we think Fiat's goals are attainable. As for Alfa and Maserati, we hold out Jaguar and Land Rover as an example of highly tarnished but globally recognized premium brand names that, five years ago, were fading quickly. Today, the brands are thriving on a renewed product lineup, expanding into developing markets, and generating EBITDA margins that are the envy of the industry. We have made much more conservative volume and margin assumptions in our DCF model compared with FCA's plan, including one of the highest WACC assumptions in our auto sector coverage. We still arrive at a EUR 14 fair value estimate. Our assumptions include annual average revenue growth of 4% to EUR 104 billion
and EBITDA margin expansion of 200 basis points to 11.3%
at the end of our five-year forecast ending in 2018.
Preview to Fiat Chrysler 5-Year Business Plan; Stock May Be Volatile but Remains Best Idea 29 Apr 2014 We think the shares of no-moat Morningstar Best Idea Fiat Chrysler are appropriate for aggressive investors who are willing to accept the risks of a highly leveraged turnaround company in the cyclical, highly competitive, and capital- intensive automotive industry. This 4-star stock currently trades at a 39% discount to our EUR 14 fair value estimate.
On May 6-7, Fiat Chrysler management will host an investor conference at its Auburn Hills, Mich., offices. We expect the company to outline how it will become a more integrated globally competitive auto manufacturer, disclose additional details about its product plans, and confirm its plans to exchange on a 1:1 basis shares of new Fiat Chrysler Automotive for the shares of old Fiat SpA.
Fiat Chrysler is the stock that the Street loves to hate, and granted, this turnaround story has a few warts. We believe the naysayers will try to amplify all the potential negatives in the company's new five-year business plan--and maybe even pull a few more negatives out of the hat for good measure. We think some of the negative commentary will center on Fiat Chrysler's high debt level, limited cash flow to invest in new products, and the credibility of management's five-year forecasts. While we agree that leverage, free cash flow, and product renewal are concerns, we think the Street has overdone the pessimism. Even though we view the shares as attractively valued at their current level, we would use any downward volatility as a window of opportunity to own shares at an even more attractive level. Last year, Fiat's shares appreciated 57%, while year to date the stock has jumped another 43%.
Fiat Chrysler has come a long way in the past five years
Analyst Notes
since Fiat took managerial control of Chrysler. For the most part, Chrysler has progressed as management had said it would, producing $18.1 billion in EBITDA and spending
$13.8 billion in capital from 2009 through 2013. The company has also gained roughly 3 percentage points in market share, completely refreshed its product lineup, and expanded the Jeep brand into other regions. However, Fiat operations have performed nowhere near the last five-year plan. Giving management some slack, the European market for new light vehicles has not at all been what anyone had expected. European demand has been a prolonged skid for six consecutive years, possibly reaching the trough at the end of 2013. Italy is Fiat's largest European market, and since the peak in 2007, Italian new-car registrations have declined more than 40%, dealing Fiat Chrysler a severe blow to profitability.
We expect Fiat Chrysler to take a page from the German automakers' playbook when it reveals its five-year plan.
Since the company hemorrhaged red ink in its Italian operations during the protracted downturn, we look for Fiat Chrysler to discuss how it will develop more high-end models to be produced and exported from its Italian operations. Audi, BMW, Mercedes-Benz, and Porsche are all examples of premium-priced vehicle brands that are well recognized around the globe. The German car companies have done an excellent job capitalizing on that recognition with exports to fill German capacity. Fiat Chrysler is likely to attempt to do the same with Maserati and Alfa Romeo.
Maserati has already begun expanding with the introduction of the Ghibli midsize model at the end of 2013. Last year, the company more than doubled Maserati volume to 15,000 units but has stated its objective to reach annual sales of 50,000 units by 2016. We forecast that the brand reaches about 37,000 units in 2018.
Alfa Romeo expansion has been put on hold at least twice since Sergio Marchionne took the helm of Fiat at the end of
2004. Even so, we think it was for good reason that the delays have occurred. At the beginning of his tenure, Marchionne needed to focus more on launching new Fiat models and turning around inefficient Italian operations that were in even worse shape than they are today. Through 2008, the company did exactly that, but being overburdened with debt, Fiat did not have the resources to expand Alfa by the time Chrysler became available in 2009.
The five-year plan published by Fiat at the end of 2009 exclusively for Chrysler operations and the consolidated version at the beginning of 2010 for Fiat Chrysler included the expansion of Alfa Romeo to 500,000 units. More recently, Fiat management has been quoted as saying that it wanted to triple Alfa Romeo sales by 2016 to 300,000 units. We would be happy to see 200,000 units sold in a single year, representing a double from current annual sales.
Even so, media reports have been that the company is planning a total of seven new Alfa Romeo models (the brand currently has two) by 2018.
We expect the integration of Fiat Chrysler to include at least two more global architectures. To date, the company has only one global platform, code-named CUS. The CUS and the wider CUSW derivative architecture was taken from the Alfa Romeo Giulietta and may be used in an upcoming smaller Jeep crossover (possibly called the Renegade) in Europe. It's the underpinnings of the Dodge Dart, Jeep Cherokee, and the soon-to-be-launched all-new Chrysler 200 in North America, as well as the Fiat Viaggio, the Jeep Cherokee, and possibly a new Jeep model (also the Renegade?) in China. To extract economies of scale and become a globally competitive automaker, Fiat Chrysler needs at least two more of this type of flexible architecture, in our opinion, on which it can produce roughly 1 million units around the world.
Our five-year forecast assumes that Fiat Chrysler reaches
Analyst Notes
EBITDA margins of 11.3% in 2018. In the previous five-year plan, management forecast a consolidated EBITDA margin range of 11.7%-12.5%. Given that Chrysler's EBITDA margins have surpassed 12%, and expecting a recovery in Europe along with the expansion of Maserati and Alfa Romeo, we would be disappointed if Fiat Chrysler's new five-year plan did not exceed our margin assumptions. At our assumed level, the company would be more profitable than Peugeot, which we forecast to peak at slightly more than 9%, and less than Renault at 12.1%, which includes alliance partner Nissan's contribution.
We also expect to hear details on the company's progress toward corporate integration. Management has said it expects to complete the legal paperwork necessary to be fully integrated by the end of the third quarter. This includes exchanging one share of old Fiat SpA for one new share of Fiat Chrysler Automotive. The new stock will have its primary listing on the New York Stock Exchange and will maintain a listing on the Milan Stock Exchange. The new entity will be incorporated in the Netherlands and have a corporate address in the United Kingdom for tax purposes.
For 2014, we continue to expect Fiat Chrysler's consolidated revenue to increase slightly less than EUR 4.0 billion, or 4.3%, to EUR 90.3 billion versus management's forecast of about EUR 93 billion. We also forecast a trading profit (operating income excluding special items) of EUR 3.4 billion compared with Fiat Chrysler's guidance of EUR 3.6 billion- EUR 4.0 billion. The company's 2014 guidance may be in for a downward revision when management reports first- quarter results May 8, as we expect South American operations to lose money on weakening economic conditions, deteriorating new-vehicle demand, and the impact of devalued currencies including the Brazilian real, Argentine peso, and Venezuelan bolivar. Fiat Chrysler has already announced that it expects the Chrysler division to take a $130 million pretax remeasurement charge on the
way Chrysler translates its Venezuelan currency-based financial statements.
Best Idea Fiat Stock Up 47% Since Beginning of Year 01 Apr 2014
No moat rated, Morningstar Best Idea Fiat Chrysler Automotive crossed the threshold from 5-Star to 4-Star for the first time since we began covering the stock in 2011.
Year to date, the Milan-traded shares are up 47% from the year-end EUR 5.95 close to EUR 8.77 at the close of trading on Tuesday. This week, the company held its annual shareholders meeting, probably for the last time in Turin, Italy, as the new Fiat Chrysler Automotive N.V. will be incorporated in the Netherlands and, for tax purposes, will have a corporate address in the United Kingdom.
The company also reported favorable U.S. sales results for the month of March, increasing 13% compared with the same month a year ago. The company's results were driven by the addition of the Jeep Cherokee, the new Fiat 500L extended version of the 500, and by hefty incentives for the Ram pickup. Although the market was up by 6% compared with March last year, Fiat Chrysler sales increased by 13%.
As a side note, Maserati sales catapulted more than 300%
to 963 units for the month on the introduction of the Ghibli midsize luxury sedan. We have been forecasting Maserati growth in our DCF model to annual unit volume in the 35,000- unit range from around 7,000 prior to the company's efforts to expand the brand and versus management's goal of selling 50,000 vehicles annually beginning in 2015.
We view Fiat as appropriate for investors who are willing to accept the risk of a levered, turnaround company that does business in the cyclical, highly competitive, capital- intense automotive industry. In our opinion, the stock is still attractively valued, trading around a 37% discount to our EUR 14 fair value estimate.
At the annual shareholders' meeting, management
Analyst Notes
confirmed 2014 guidance, saying that the necessary legal work to complete the acquisition of 100% of Chrysler should be completed before the end of the year, and that the combined organization will have the capacity to produce 6 million-7 million vehicles per year. Fiat has guided analysts to revenue of EUR 93 billion, trading profit of between EUR 3.6 billion and EUR 4.0 billion, and earnings per share of EUR 0.44-EUR 0.60, including a deferred tax charge for roughly EUR 500 million (EUR 0.40 per share) due to the recognition of net deferred tax assets at year-end 2013 to Chrysler. Our DCF model forecasts 2014 revenue of EUR 90 billion on continued anemic Italian demand, a 5% decline in Brazilian volume, offset by a 7% increase in North America due to the introduction of new models. Our margin assumptions are nearly flat with 2013, leading to a trading profit of EUR 3.4 billion and earnings per share of EUR 0.40.
Fiat also told shareholders that it still expects to complete the full acquisition of Chrysler before the end of 2014. The company has an internal goal to start trading new common shares on the New York Stock Exchange on Oct. 1, but management admits that this is a stretch. Our thesis remains intact--Fiat has acquired the remainder of Chrysler that it did not already own and will now proceed to integrate the organization, creating a global automotive company with synergies-of-scale previously unavailable to the formerly separate Fiat S.p.A. and Chrysler Group LLC.
One such synergy is evident in the capacity potential management highlighted at the shareholder meeting. With production facilities capable of churning out 6 - 7 million vehicles per year, the company is approximately twice as large as the former Fiat and Chrysler were on their own. The scale takes both organizations from formerly being around the twelfth largest producers individually, to being the seventh largest worldwide. Fiat Chrysler currently has one global platform code named CUS. This basic architecture forms the underpinnings of the Dodge Dart, the new Jeep
Cherokee, and the upcoming all-new Chrysler 200 mid-size sedan in North America. In Europe, the platform is used for the Alfa Romeo Giuliette. The CUS architecture also forms the basis of the Fiat Viaggio made in China with partner Guangzhou Automotive. To more efficiently utilize its scale we think the organization will eventually produce three global architectures in multiple regions around the world.
Two Important Model Assumption Changes That Highlight Our EUR 14 Fair Value for Fiat Chrysler 30 Jan 2014
We are maintaining our EUR 14 fair value estimate on no- moat, 5-star-rated Fiat Chrysler. Our new assumptions include two important changes to our discounted cash flow model that we believe strengthen our case for how unfairly the Street punishes Fiat Chrysler's stock. Management increased by less than 100 basis points the discount rate on the U.S. pension and other post-employment benefits, reducing the underfunded status of the plans by EUR 3.0 billion.
We would usually respond with an increase in our fair value estimate. Instead, we offset the increase with tighter margin assumptions, which lowers our 2014 estimates from being within management's guidance to being just below it. As a result, we are maintaining our EUR 14 fair value estimate. Currently trading at only 53% of our fair value estimate, Fiat Chrysler's stock represents a compelling valuation, in our opinion, for investors who are willing to accept the risk of a highly leveraged turnaround situation in a cyclical, capital-intensive, fiercely competitive global industry.
It has been part of our investment thesis that Fiat Chrysler does not need to become the next BMW in terms of product execution, nor does it need to manufacture at the same efficiency as Toyota. Our EUR 14 fair value estimate is simply
