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Long Ideas

Fiat-Chrysler has more value than you think

Fiat-Chrysler has more value than most investors realize, because Nissan and Renault SA (OTCMKTS: RNSLY) want to buy it. In fact, the Nissan Motor Co (OTCMKTS: NSANY) and Renault are considering a hostile takeover of Fiat-Chrysler Automobiles (NYSE: FCAU).

To explain Renault management is proposing a merger to Nissan to get the resources to by Fiat Chrysler or FCA, Bloomberg claims. News articles euphemistically call the proposal a “merger” but it looks like a takeover.

Renault wants Fiat-Chrysler because the French company is  one of the major automakers without a serious presence in North America. Fiat-Chrysler owns the popular Dodge, Ram, and Jeep brands in North America. In addition, Nissan could increase its North American sales with Fiat-Chrysler’s help.

Currently, Renault owns 43% of Nissan and Nissan owns 15% in an alliance. The two companies want to compete with auto giants like Volkswagen (VOW.DE) and Toyota (NYSE: TM). Moreover, Renault depends on the unstable European auto market for much of its business.

Why Renault and Nissan Want Fiat Chrysler

It is easy to see why Renault and Nissan want Fiat-Chrysler. Some of its brands sell well in North America.

For instance, Jeep sold 973,227 vehicles in the United States in 2018, up from 828,522 in 2017, FCAUAuthority estimates. Meanwhile, Chrysler sold 536,980 Ram pickups in the USA in 2018 and 500,723 pickups in the USA in 2017, Caresalesbase estimates.

In contrast, Nissan Group sold 148,720 vehicles in the United States in 2018, and 121,847 vehicles in 2017, a press release reveals. Hence, Nissan is not a major player in the US auto industry.

In fact, the US sales of just one Fiat Chrysler brand, Jeep, are nearly 10 times greater than Nissan Group’s. Obviously, Nissan and Renault want a larger slice of the US pickup and sport utility vehicle (SUV) markets. Moreover, the easiest way to get that slice is to buy Fiat-Chrysler.

Not surprisingly, Fiat-Chrysler is expanding Jeep, Ram, and Dodge production. In particular, FCA will spend $4.5 billion to upgrade six Detroit area plants, Fortune reports. Sensibly, FCA is retooling those plants to build the Jeep Wagoneer and Dodge Durango SUV. In addition, Jeep plans a new bigger SUV with more seats.

Fiat-Chrysler is working with Waymo on Self-driving cars

Beyond, Jeep and Ram’s popularity there is Fiat-Chrysler’s partnership with Waymo. To clarify, Waymo is the autonomous vehicle start up Alphabet (NASDAQ: GOOG) owns.

Notably, Waymo is buying 62,000 Chrysler Pacifica minivans for its self-driving fleet, Fortune reports. Waymo is using the vehicles for Waymo One, the ride-hailing service it is testing in the Phoenix area.

Thus, Nissan and Renault and could get a partnership with Waymo and a stronger position in autonomous vehicles with Fiat-Chrysler. In particular, the new larger Jeep with more seats sounds perfectly suited for autonomous ride-hailing.

Fiat Chrysler is well-suited for ridesharing

Finally, Fiat-Chrysler is in a position to tap the growing ride-hailing market with models like the Dodge Grand Caravan, Chrysler Pacifica, Grand Wagoner, and Dodge Durango. To clarify, those larger vehicles contain lots of room for passengers and luggage, which is what Uber and Lyft drivers want.

The ride-share market is large, for example, there are over 750,000 Uber drivers in the United States, Business of Apps estimates. In addition, analysts valued Uber at $72 billion in 2018.

Moreover Uber’s American competitor Lyft claims to have over 1.5 million drivers in the United States and elsewhere, Expanded Ramblings reports. In addition, Lyft, which just held an initial public offering (IPO) claims to have given 178.4 million rides in 4th Quarter 2018.

Therefore, Nissan and Renault can expand their presence in ride sharing by buying Fiat-Chrysler. In addition, autonomous vehicles could magnify Fiat Chrysler’s presence in ride sharing. I think Waymo One, in particular, could become a major player in ridesharing – if its autonomous vehicle technology works.

Is Fiat Chrysler Making Money?

Thus Fiat Chrysler is well-positioned to cash in on the future of transportation with ride sharing and autonomous vehicles, but is it making money today?

The answer is yes because FCA reports a gross profit of $17.702 billion on revenues of $126.318 billion for 4th Quarter 2018. In addition, Fiat Chrysler reports an operating income of $5.66 billion and a net income of $4.147 billion for 4th Quarter 2018.

Moreover, Fiat-Chrysler reports a free cash flow of $5.237 billion and an operating cash flow of $11.434 billion for 4th Quarter 2018. Finally, Fiat Chrysler had $15.017 billion in cash and short-term investments on 31 December 2018.

Fiat Chrysler is a value investment

Thus, FCA has a lot of cash to invest in expansion and new models. Importantly, Fiat-Chrysler spends that money where it can get the most bang for its buck; in the North American truck, SUV, and van markets.

Minivans, SUVS, and pickup trucks are not as sexy as sports cars, but they are Americans’ and Canadians’ favorite rides. In fact, most Americans; and Canadians, have an SUV, a van, or a pickup sitting in their driveways. Thus, Fiat-Chrysler is building the vehicles that North Americans want and investing in the areas of the auto business likely to grow.

Hence, I consider Fiat Chrysler (NYSE: FCAU) a value investment at the $15.43 a share it was trading at on March 28, 2019. Additionally, Fiat-Chrysler plans to pay a 74₵ special dividend on 2 May 2019, The Detroit Free Press reports.

Thus, Nissan and Renault are smart to consider buying Fiat Chrysler. Average investors looking for a cheap growth and dividend stock will be smart to investigate Fiat Chrysler Automobiles.