Fiat Chrysler Automobiles’ (NYSE: FCAU) best hope of survival is a class of vehicles that many Americans despise: the humble minivan.
Chrysler’s minivan sales exploded between the first half of 2015 and the first half of 2016, Seeking Alpha contributor Anton Wahlman pointed out. Sales of one of its minivan models; the Dodge Caravan grew by 94% and sales of another the Chrysler Town & Country increased by 42%.
Wahlman was one of the few people outside the auto industry who noted this but Chrysler’s executive suite certainly noticed. The company has decided to stop manufacturing cars in the United States; instead it will concentrate on the building of SUVs, pickup trucks and vans, CEO Sergio Marchionne announced in July.
Marchionne pulled the plug on car production because Chrysler has not been able to capture significant market share from automakers like Toyota (NYSE TM), Honda (NYSE: HMC) and Volkswagen (OTC: VLKAY), which dominate the U.S. sedan market. The company was not able to attract sales despite introducing two really impressive sedans; the Dodge Dart and the Chrysler 200, USA Today reported.
Chrysler is going all out on minivans it has introduced two new minivan models to the US; the Dodge Ram City Master Pro for commercial customers and the Chrysler Pacifica. It has also discontinued the awkwardly named Town & Country. More intriguingly it has entered into a partnership with Alphabet (NASDAQ: GOOG) to develop a self-driving minivan based on the Google car technology.
A team of Alphabet (NASDAQ: GOOGL) engineers has been deployed to Michigan to help design 100 new minivans that will be use Google’s technology. The idea seems to be to develop a self-driving taxi or shuttle van. Another use of vehicles might be as a delivery van for Alphabet’s same-day delivery service Google Express.
Is Fiat-Chrysler a Value Investment?
With its minivan success, Fiat-Chrysler is taking on many of the attributes of a value investment. It is concentrating on a neglected segment of the auto market that is far from sexy; minivans.
That segment is growing even though a number of automakers; including General Motors (NYSE: GM), Volkswagen and Mazda, have pulled out of it. Ford (NYSE: F) kept is commercial minivan; the Transit Connect, and has quietly reentered the passenger minivan market in recent months.
Chrysler is concentrating its resources on profitable areas like a true value investment. It has actually become something of a contrarian investment by bucking the trends in the auto business such as luxury sedans.
How Uber Makes Fiat Chrysler a Contrarian Investment
Minivans are more of a contrarian investment than you might think because they are the perfect vehicle for use in the ride-sharing business. A Chrysler Pacifica or Dodge City Master Pro; particularly one equipped with a diesel, electric or hybrid engine, would be the perfect Uber car. It can seat several passengers, it is stylish and there is plenty of room for luggage for the airport run.
An even better use of a van would for delivery work. Both Uber and Lyft are participating in a same-day delivery experiment with Walmart Stores Inc. (NYSE: WMT). Amazon (NASDAQ: AMZN) is reportedly exploring the possibility of creating its own Uber type app for same day delivery.
That is good news for Fiat-Chrysler because a Dodge City Master Pro or Caravan would be the perfect vehicle for an Uber same day delivery driver. She would be able to use it to haul groceries and shoes to Walmart.com customers and ferry the kids to the soccer game.
Chrysler is not the only company thinking along those lines. Ford announced that it will try to develop the first truly autonomous vehicle for ridesharing and taxi use by 2021. Ford is a major threat to Chrysler because of its vast resources; including $39.3 billion in cash and short-term investments, $239.68 billion in assets and $155.6 billion in revenue on June 30, 2016.
Ridesharing services have the potential to generate a lot of float for Fiat-Chrysler in the form of leases and financing plans for drivers. Uber already offers financing to its drivers in the form of a scheme in which the loan or lease payments are taken out of the driver’s fares. Chrysler is one of the companies participating in this plan.
Yes Fiat-Chrysler is a Value Investment
Even without the minivan opportunity Fiat-Chrysler is most definitely a value investment because of its low price ($6.81 a share on September 28, 2016). For that low price, Fiat-Chrysler investors will get a lot of bang for their buck including:
- $113.61 billion in assets on June 30, 2016.
- $121.44 billion in revenues on the same day.
- $11.58 billion in cash from operations for second quarter 2016.
- A lot of float in the form of $21.42 billion in cash and short-term investments.
- A free cash flow of $2.041 billion on June 30, 2016.
There were also some problematic numbers that make Fiat-Chrysler a long-term buy and hold play. Its net income was just $796.77 million, -$4.074 billion cash from financing, and there was no dividend yield. Shareholders last received a 1¢ dividend on January 4, 2016, making for a dividend yield of 0% on September 28, 2016.
The shareholders also received a paltry 4.6% return on equity on September 28, 2016. Despite that Fiat-Chrysler is decidedly undervalued with a market cap of $10.50 billion and an enterprise value of $17.37 billion on September 28, 2016.
Fiat-Chrysler is one of those value investments that might pay off if somebody is willing to hold for a long time. It is a pretty good company, with some strong brands (Jeep, Dodge and Ram in particular), excellent management and a potential market Uber that is growing like a weed. If it can become the master of the minivan, Fiat-Chrysler will achieve the status of value investment at some point.