Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
What a beautiful, instructive quote from Warren Buffett’s teacher, Ben Graham. That quote comes from Graham’s discussion of Mr. Market in chapter 8 of The Intelligent Investor.
And lately, when it comes to Fiat Chrysler, I have been following Ben Graham’s advice like a dedicated student.
In early February, Fiat Chrysler’s stock price dropped 16% after they reported 2018 fourth quarter earnings. As the Wall Street Journal notes, investors dumped the shares after Fiat Chrysler reported a strong fourth quarter but a lowered outlook for 2019. Analysts weren’t impressed, they’re saying the 2019 is off-target from their current 5 year plan, and they sold down the stock.
I reviewed the fourth quarter earnings, the 2018 annual results, and despite the lowered guidance, I still think the business results have been great, the stock is cheap, I’m encouraged by what I see, and I’m continuing to load up on Fiat Chrysler stock.
Business Results And Dividends
I’m encouraged by what I see with the business results and coming-dividends from Fiat Chrysler.
Let’s briefly review some recent business results.
Magneti Marelli – The company expects the sale of their parts business, Magneti Marelli, to a Japanese company to be finalized in the second quarter of 2019. The sale price is expected to be $7.2 billion. The company’s current market cap is $23 billion. So as business owners, we’re going to turn over 30% of our market cap into new cash, and all we’re giving up (by my calculations based on this press release) is 4% of our revenues and 7% of our adjusted net profit. And Fiat Chrysler plans to send some proceeds from this sale back to shareholders in the form of a $2.3 billion extraordinary dividend. Which is a 10% extraordinary dividend based on the current market cap. Fiat Chrysler is selling 4% of the revenue and 7% of our profits and in return the company is keeping $4.9 billion in new cash and sending $2.3 billion back to shareholders as a one-time 10% dividend.
Regular Dividend – In addition to the special Magneti Marelli sale dividend, Fiat Chrysler also plans to implement a new, annual dividend, targeting 20% of earnings. The proposed dividend is 0.65 euro per common share, which is 74 cents and equates to a 5% dividend at the current stock price as I write this. Subject to shareholder approval, the dividend will be payable May 2nd.
A Growing Company – And I see a healthy, growing company with hot brands. Jeep sales were up 14% last year and Ram sales were up 5% (see page 3). They’re bringing 6,500 new jobs to Michigan and are investing $4.5 billion there to build more Jeeps. And if things pick up in China in 2019 that will be a nice, positive addition.
Valuation – $23 billion market cap, currently $14.76 a share. They’re expected to earn about $3 a share in 2019, and their plan is to earn $7 to $8 a share in 2022. So if they accomplish their plan (and they accomplished their most recent 5 year plan) they’re currently at a PE of 2 or less than 2 for their earnings in three years. So my point is that if they accomplish their goal and earn $7 to $8 a share in 2022, the stock price should be much higher, since they’re probably not going to be selling for a PE of 2.
Debt – The company is reporting “net industrial cash” of $2.1 billion. I’m old fashioned, I don’t know what net industrial debt means, and I like to focus on old fashioned debt versus cash. And at the end of 2018 they’re reporting $16.7 billion of debt and $15 billion of cash. So they’re almost net debt free. This compares positively, to put it lightly, to Ford’s net debt of $131 billion and General Motors’ net debt of $83 billion.
Overall, I like where we’re at. We’re basically net debt free, we have growing, hot brands, we have a dedicated, strong management team, we’ve got 15% of combined dividends coming back to us soon, we’re at around a PE of 5 on 2019’s earnings, and if they hit their plan for 2022, we’re currently selling for a 2022 PE of 2.
I’m continuing to buy at current price levels. I like the low valuation, the growing sales and earnings, the strong brands, the high cash and low debt, the coming dividends, and I think there’s a very good chance the stock price will be higher in three to five years, based on higher earnings.
Mr. Market does his thing, and I do mine. As Ben Graham instructs, I’m monitoring my company’s operating results and dividends, and I’m using Mr. Market as an opportunity to buy when prices fall sharply.