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Stock Strategist

Fiat's Patience Pays Off

We applaud management for remaining constant in the face of union pressure for a higher price.

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 Fiat (FIATY) said Wednesday that it had reached a deal with a United Auto Workers trust to buy the part of Chrysler it doesn't already own. In mid-December, we said Fiat would pay EUR 3.2 billion for the rest of Chrysler. At the current exchange rate of $1.3738 to EUR 1, $4.35 billion is EUR 3.166 billion. The final consideration is not what the union said it expected to get from an initial public offering, which was more than $5.0 billion.

We do not anticipate any change to our $19 and EUR 14 fair value estimates for Fiat, since we hit the valuation nail squarely on the head. However, there could be a slight upward bias because we included the assumption that the deal would be closed by the end of the second quarter. With the deal closing possibly Jan. 20, nearly two quarters of Chrysler earnings at 100% of ownership are not accounted for in our fair value estimate. But since the incremental earnings are in the first part of our five-year discounted cash flow model, we expect the upward bias to be minimal. Still, the 5-star-rated shares represent exceptional value for those investors who are willing to accept the risk of a highly leveraged turnaround situation in a cyclical, capital-intensive, globally competitive industry.

Richard Hilgert does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.