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By Richard Hilgert | 10-07-2014 10:00 AM

A Risky, but Misunderstood Automaker

Management credibility and debt issues have been clouds over Fiat Chrysler's stock, but the deep discount to our fair value estimate could make it an interesting if volatile pick.

Richard Hilgert: Morningstar best-idea stock, Fiat Chrysler (FIATY), 5-star rated. Wall Street really misunderstands this stock, and the reason why they misunderstand it is partially because of management credibility and previous five-year plans that the company has put out. Those five-year plans had things like unit volume in Europe really messing up the plans, along with the fact that Chrysler became available in April of 2009. That has really changed this company structurally.

Operationally, we look for additional integration and cost savings to come from future five-year plans that are currently in place. Those plans we've substantially discounted in our model, and we still come up with a fair value estimate of €14, which shows you the credibility issue with the stock currently trading at €7.

Sell-side analysts think that the stock will trade on a P/E basis once it shifts over from IFRS accounting--International [Financial Reporting Standards] accounting--to U.S. GAAP accounting [generally accepted accounting principles], and we think that this is incorrect. The company should trade on an EBITDA [earnings before interest, taxes, depreciation, and amortization] basis. And no matter which accounting methods you're in, the EBITDA should come out about the same.

The bottom line also is debt leverage. This is an issue for the company because it is a highly leveraged company. The cash position, though, is on a relative basis one of the best in the industry, and I think that the Street really discounts that position and unrightly so. With the current five-year plan in place, we think there will be enough cash to weather through any difficulties and eventually pay down debt.

So, 5-star rated Fiat Chrysler is going to be a risky stock. We do expect there to be some volatility in the stock price. But with the stock currently trading at €7, we think this is something that investors should be looking at.

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