What’s next for shares of Fiat, GM and Tesla?
Fiat chrysler shares were slammed after the tragic death of its charismatic CEO and turnaround maestro Sergio Marchionne. After all, Marchionne rescued a nearbankrupt Fiat in 2004, masterminded the buyout of Chrysler after the financial crisis, led the IPO of Ferrari and executed the most financial lucrative turnaround in the history of Big Auto for shareholders. After its recent losses, Fiat Chrysler trades at below five times earnings. This makes no sense to me since the Agnelli/Elkann clan, Fiat’s largest shareholder, have announced that Mike Manley, who turned Jeep into a global brand profit engine will be Marchionne’s successor. Fiat will also benefit if Mexican President Lopez Obrador concludes a Nafta deal with the US because of its huge manufacturing footprint south of the Rio Grande.
What could be the catalyst for a potential revaluation of Fiat shares? One, a potential IPO of its Maserati and Alfa Romeo brands. Two, a rumoured spinoff of its component maker Magneti Marelli to shareholders. It is significant that Manley has publicly affirmed Marchionne’s target of €13-€16 billion earnings before interest and taxes by 2022. True, secondquarter profits declined due to production bottlenecks in the new Ram pickup models. Yet I can discern optimistic trends in the data too. Jeep Wrangler and Cherokee are on a market share roll in the US. Lower capex will lead to higher free cash flow yields. If Fiat shares surge 30 per cent again, it will be the ultimate testament to the memory of Signore Marchionne, the most legendary industrial wizard of Turin since the late Maestro Giovanni Agnelli.
General Motors was sold by fund managers after it missed Street consensus on revenues and EPS. Management expects earnings per share in 2018 to be $6 now, not the $6.41 Wall Street sell side analysts had projected in their financial models. This means General Motors is now trading at six times its current earnings estimates, its cheapest valuation since Uncle Sam offloaded its TARP stake in 2010 even though Mary Barra has restructured/derisked the business after the tragic faulty ignition switches scandal. GM of- fers a dividend yield that is almost 4 per cent. It is rational for the financial markets to ascribe such a Cinderella valuation to General Motors since it is the US automaker most exposed to a US-Chinese trade war, given the scale of its joint venture production and sales exposure in the Middle Kingdom, with the higher margin Cadillac brand now 17 per cent of Chinese sales.
There is also angst in the stock market that General Motors will be vulnerable to the next downdraft in the US auto cycle, though the US consumer seems on a roll with the lowest unemployment rates since the 2006 credit bubble era. The big risks for GM are a consumer boycott of American brands if Washington’s geopolitical tensions with China escalate and higher steel/aluminium import prices. However, a critical mass of “bad news” is now priced in the shares and my logic of living life in the second derivative warrants a buy at the $36 level for a $42 target.
I believe Tesla shares are grossly overvalued at $348 and are headed at least $100 lower in the year ahead. The electric car firm’s cash burn rate is still $1 billion a year. China is at least onefifth of Model 3 sales. The Model 3 production update is still not credible to Wall Street and 2019 earnings are at grave risk. There is a $12 billion short interest in the shares, proving that the smart money believes insolvency risk is dangerously high.
I am deeply troubled about the class action lawsuit that alleges false claims about the Model 3 sedan production. CEO Elon Musk’s Twitter storm with the hero of the Thai cave rescue is the latest in a series of megalomaniac behaviour that does not exactly boost confidence in the shares. However, I would not advise individual investors to short Tesla shares since the short interest means short squeezes can inflict catastrophic losses. This is exactly what happened last week after Musk apologised to two Wall Street analysts he had dissed in the first-quarter 2018 conference call.
Tesla lost $3.06 a share on sales of $4 billion in the second quarter. The new Model 3 production target is 6,000 per week with a 20 per cent margin in the fourth quarter. Musk now asks Wall Street to believe that he will be profitable in the third quarter. Dream on!