2018 Pabrai Dhandho Annual Meeting
I attended this year Pabrai’s annual investors’ meeting in Irvine California which is held every year in September. This was my third time and I genuinely enjoy going each year. It’s a great chance to get close up with the guru himself who has always interesting anecdotes to tell about investing and life.
Watch the Youtube video here: https://youtu.be/AGcUTNsbV9w
The presentation itself was held at Soka University’s auditorium, and it was structured into three parts: First, a video documentation about Sergio Marconi – former’ CEO who passed away, with a quick presentation about his investment in Fiat Chrysler and what role Sergio played in his investment decision.
This was followed by a detailed update on his various funds’ performance that has been outperforming major indices since their inception. He talked about some of his investments he closed over the last year. Included was an update on his rather unfortunate business endeavor – Dhando Holdings, which has been winded down for some time now. The good news was that investors in Dhando Holdings would exit without a loss, a fact that apparently relieved Pabrai himself as the largest investor.
The two-part presentation took about 40 min. It was closed with a long Q&A session that took almost 1.5 hours. During this Q&A session, some interesting questions were brought forward. They included questions about his past and existing investments, but also Pabrai’s investment philosophy, his outlook on the Indian Stock market and his philanthropical projects. Even a question on Tesla’s future came up. After more than two hours the investor’s meeting came to an end and we all headed for drinks and finger food outside the auditorium enjoying a warm California evening and some stimulating talks among investors, journalists and fans.
What should be pointed out about the whole event and Pabrai’s investment management company is Pabrai’s unique fee structure for all of his funds that even received public laudation by no other than Charlie Munger, Vice Chairman of Berkshire Hathaway. In an industry where fee income is everything, Pabrai doesn’t charge a penny on any of the assets, only on pure performance earned and only then when a set performance hurdle is taken!
The Fiat Chrysler Investment Case – Marchionne’s legacy
Though the whole 2 hours session was full of interesting information and new inspirations, I would like to focus on the core of Pabrai’s investors’ meeting – Fiat Chrysler (FC).
FC is one of Pabrai’s three core positions that make more than 55% of NAV. No doubt, this investment is very important to Pabrai.
Pabrai got first involved in FC in 2012. Since then he has considered FC a low PE stock with an outstanding leader – Sergio Marchionne. Right from the start, he considered Marchionne, who joined Fiat in 2004, a manager with unique capabilities and skills that come once in a century and over the years his admiration for Marchionne only grew over time. FC’s operational results and development under Marchionne’s leadership supported this admiration.
It’s one of the turn-around stories of this decade
From a near collapse of Chrysler in the aftermath of the subprime crisis and the subsequent recession (2009 after Chrysler filed for Chapter 11 bankruptcy reorganization), Fiat got involved because it had the money and the man to turn things around. Marchionne combined car companies, cut cost, streamlined production and clever managed its mode/brand portfolio. The core success story is Jeep – one of the crown jewels besides Ferrari on FC’s balance sheet.
The result: Despite stagnant revenues in 2017, the company created a 93% increase in net income to $3.49 billion through prudent management and strengthening truck/SUV sales. Thus far in 2018, the company has successfully increased its sales revenue, while also driving continued earnings growth.
But most importantly Marchionne sorted out succession issues with the early support of young management talent within their own ranks. This strategic decision should come in handy as the fate of FC would take a dramatic turn – not least for Marchionne himself.
Life Continues
On July 21, 2018, Marchionne suddenly passed away a shock for the entire car industry and their investors. There are many rumors about his death and the causes for it, ranging from him already knowing his fate but keeping it secret but only the closest family members to a sudden and unforeseen complication of a surgical operation. The fact remains, Marchionne seemed to have prepared FC for this situation, as a complete succession plan has been already in place and here is where Pabrai’s current investment these in his FC investment is based on.
Marchionne prepared not only his successor but an entire generation of successors and their successors. With Mike Manley, he groomed a capable CEO handing him the blueprints to lead it – with Manley at the top, the true value that Marchionne had accumulated in prior years will have a chance to bear fruits in coming years. According to Pabrai, there is no reason to sell now, as FC is still massively undervalued with the potential to triple or more in value.
Pabrai’s Investment Case
According to Pabrai, FC is a 2 to 3 PE company based on 2020 forecasted earnings – for him a no-brainer investment decision to be invested in FC for the long-term. An investment that keeps on giving. One example is Ferrari.
After Sergio passed away, Pabrai exited his position in Ferrari, a spin-off stock that he received through FC in 2016. A rough investment of $23 million turned into $100 million for Pabrai. According to himself, he left plenty of money on the table as the price of Ferrari’s stock price continued to increase ($180 million).
The rationale behind Pabrai’s decision to sell Ferrari was that he didn’t feel as confident in keeping Ferrari as he felt with keeping FC. The numbers confirm his selling decision. Ferrari is currently overvalued as of 2018 base on conventional valuation parameters. Ferrari’s F1 team (Follow me @f1insidercom) seem to have given up on this year’s Championship and the team’s leadership seems to steer towards a management shake-up after a string of catastrophic team decisions that most likely have cost them the championship.
Mixed with the fact that Marchionne left unfinished business behind at Ferrari triggered the decision to sell. (Marchionne was supposed to work more hours at Ferrari after a successful transition period at FC. Yet, his influence at Ferrari was already greatly felt as he even after his death seemed to have determined driver decisions at Ferraris Formula One time)
Though since holding FC from 2012, the stock price has seen a rise as of September 2018 it hasn’t been a very smooth investment for Pabrai. So far, FC investment has been a success but of late FC’s share price has seen a substantial drop from its highs of $24 in Januar, 2018, to $18 by the end of September 2018.
The Truffle Comment
Even though I share Pabrai’s admiration for Marchionne and his enthusiasm for FC’s long-term prospects, especially compared to companies such as Daimler or Volkswagen, I am more cautious for its immediate or mid-term outlook and so far the stock price seems to support my thesis.
As one analyst wrote, “While the potential upside is big there is still a good chance that the stock is at risk of a cyclically decline.”
The case for FC is that it will not be able to overcome a slowing car cycle, driven by higher interest rates and the effect of a prolonged trade dispute between the US and China – and this doesn’t consider global sales but global supply chains and the psychological impact on consumers and producers.
Critics of FC are also quick to point out FC’s unbalanced assets with an overreliance on Ram trucks and Jeep while suffering for the weaknesses in Dodge and Chrysler. On top of that, FC doesn’t seem to be a leader in the rising trend of EV and e-mobility in general. Other companies, under pressure from Tesla, seem to have gained an edge in recent months.
As a true long-term value invest Pabrai is not concerned. His investment philosophy has served him well and it will do so again with Fiat Chrysler.
I recommend my readers two possible options to trade or invest in FCA:
- subscribe to The Monthly Truffle here!
[1] The transcript of the entire presentation and past presentations can be accessed via http://www.pabraifunds.com/
