Fiat Spa: Love For SaLe (F.

Mi)
By Steven Wood, GreenWood Investors LLC

Fiat SpA: Love For Sale

Friday, August 24, 2012 Unions and Low Margins and Italy. Oh my!
You get that same feeling when you think of lions and tigers and bears, or when you thought about the Detroit automakers in the winter of 2008, the same time we were piling in money into Ford Motor bonds and equity (see our internal memo from 9/25/08). Of course this time around, Fiat SpA (F IM) is the company in question. It has the same symbol, is family-controlled, is run by a fabulous CEO and it has a very similar valuation to Ford's at the time of 2008 congressional hearings, if not cheaper (relative to mid-cycle earnings). The company is ahead of a significant two-year product renaissance, which together with multiple cost-saving opportunities, should go a long way to raising Fiat's mass-market operating margins from 1.5% to at least 5% (excluding Ferrari, Maserati and Chrysler). While Fiat, as all other global automakers, operates in abysmal Europe, Fiat-Chrysler is actually less exposed to Europe (as a percent of company revenue) than is Ford. And while Fiat is headquartered in Italy, where the government appears increasingly likely to default in the absence of debt monetization by the ECB, there are some stark differences this time around that make Fiat more of a no-brainer than Ford was over three years ago. An Easier Decision This Time Around (versus Ford in 2008): 1. Generating Cash: You have resilient businesses that are contributing cash to new product investment and the despondent European operations, which will be restructured in 2013 (either the company will begin absorbing current under-utilized capacity by manufacturing additional Alfa Romeo models and Jeeps, or if labor certainty cannot be reached, there will likely be several plants shuttered). Ford did not have any resilient division helping offset North American weakness in 2009. Fiat is EBIT and EBITDA positive, (whereas Ford had negative EBITDA). 2. Superior Capital Allocators: Fiats CEO, Sergio Marchionne, is perhaps the only auto CEO who understands how to rationally allocate capital. This can be proved numerically: Fiat's share count has actually decreased by 2% since 2006, vs. Ford's increase of 113%. You can see him on 60 Minutes here, or deliver a great speech here. 3. No Hidden Liabilities: There are no massive pension or healthcare liabilities on Fiat's stand-alone balance sheet (thanks to Italy's socialized medicine and generous state pensions). Chryslers current value is impeded by an underfunded pension, but the rapidly growing operating profits should fully-fund this pension over the next few years. 4. Valuation: Lastly, and most importantly, the current Adjusted EV/EBITDA (Adjusted EV= Market Cap + Net Auto Debt + Pension Underfunding) of 3.5x stand-alone and 2.7x on a proportional basis completely bakes in the negative working capital swings that come along with shrinking production volumes in Europe. Fords EV/EBITDA was negative back in 2009, not because the Enterprise Value (takeover valuation) was less than zero, but because EBITDA was negative. Fiats current valuation (see Table A) is bested only by bankruptcy-possible Peugeot. Fiat in a Nutshell Small-car manufacturer that loses money in Europe given low capacity utilization and lack of large and luxury (more profitable) models to offset structural costs. This completely changes with both platform harmonization savings and a re-launch of Alfa Romeo The largest auto manufacturer in Brazil, with nearly one quarter of this important market, with a distinct lowcost advantage vs. Volkswagen, GM and Ford (the next three largest automakers in Brazil) as Fiats massive plant is scaled up to produce 700,000 vehicles a year (contrasted to most plants producing 150,000-300,000)

A strong commercial van business in both Europe and Brazil A 58.5%-owner of Chrysler (soon to be 61.8%), the best performing full-line auto manufacturer in North America in the last year, with options to wholly-own this asset (roughly 40% of these options are struck to be neutral to Fiat's Enterprise Value, and the rest is at a fixed valuation). Using Fords and GMs adjusted valuations (Adjusted EV= Market Cap + Net Debt Finco Book Value + Pension Underfunding), the value of Fiats 58.5% stake in Chrysler is rapidly growing and worth approximately 5.1 billion (4.05 a share), up from 4.1 billion in the first quarter. This rapid growth is being fueled by the same drivers that will propel Fiat stand-alone in late 2013 and 2014: quickly growing cash-flow that allows the company to pay down debt, a powerful combination to expand the debt-adjusted value of the equity. Of course, Chrysler is growing much more quickly than Ford and GM, and should have a higher historical valuation A leader in natural gas / gasoline bi-fuel power-trains (achieving roughly an 80% market share in Europe for natural-gas vehicles), which could be a stealth "Prius" effect in the making. In the US, retail natural gas prices are less than $2.00 per gallon equivalent, and with some infrastructure / distribution upgrades, could achieve parity with the variable costs of electric vehicles while avoiding the $15-30k battery (see Table D). The new Ram pickup will offer this engine combination, and weve been trying to get the company to launch the option across Jeep and Dodge platform A 90% owner of Ferrari and 100% owner of Maserati, which is building out its luxury line-up, with important launches in 2013. Using BMWs current EBITDA multiple, Ferrari would be worth 2.0 billion (1.63 a share) if it were a stand-alone company. Of course, the durability of the Ferrari brand is much stronger than BMWs (Ferrari has a waiting list for the super car to be sold next year for over $1.5 million, while BMW is buying roughly 30% of its own vehicles off German dealer lots in order to preserve market share), so this valuation is quite conservative

And most importantly, valuation: assuming 58.5% of Chrysler's net debt, pension hole, and EBITDA, we are paying 2.4x trailing (at our average price of 4.00) Adjusted EV/EBITDA, levels which completely "bake in" the worst Italian auto sales market in over three decades and do not reflect the 2013-2014 product renaissance and variable cost savings on components and platform harmonization, and certainly no European restructuring, which will inevitably come by next year. Either labor market reforms will explicitly give Fiat a high degree of confidence in the reliability and cost efficiency of a revitalized Italian factory, or the country will lose the opportunity to repeat Volkswagens solid example of filling unused capacity with high-value production of luxury cars (Audi) and the excess capacity will be shuttered indefinitely. Table A: Global Auto OEM Comparable Valuations, Figures Converted to US Dollars Mrkt Net Auto Finco PenAdj Auto Auto Company Sales EBITDA EBIT EBITDA Cap Debt Book sion EV EBIT GM 33.2 -18.8 5.5 31.3 40.2 149.7 13.2 12.3 7.2 6.5 Volkswagen 76.0 -11.4 15.0 23.4 73.0 198.6 29.1 23.9 14.6 12.8 Toyota 130.2 -13.7 10.7 8.8 114.6 248.9 19.7 15.9 10.3 6.5 Ford 38.1 -9.6 8.7 20.2 40.1 120.2 11.0 8.8 7.2 5.1 Nissan 43.9 -6.9 5.9 2.3 33.5 113.9 13.7 9.2 6.6 4.8 Hyundai 45.0 -6.7 4.3 0.6 34.6 68.6 8.1 7.0 7.1 6.0 Fiat Group* 6.9 5.4 1.5 5.4 16.1 60.6 6.7 6.5 2.7 2.4 Chrysler 12.5 0.4 0.0 9.3 22.2 56.9 5.6 5.6 3.2 3.2 Fiat 6.9 5.1 1.5 0.0 10.4 34.7 3.4 3.2 0.8 0.6 Honda 59.9 -3.6 3.8 7.3 59.8 103.5 9.7 4.8 4.9 2.7 Peugeot 2.9 3.1 4.6 0.7 2.0 70.6 3.8 3.2 -0.4 -0.5 Renault 12.7 1.0 3.2 1.9 12.5 53.2 5.3 4.9 3.1 2.2 Median Adjusted EV Multiple Sales 27% 37% 46% 33% 29% 50% 27% 30% 58% 3% 23% 30%
EBITDA

EBIT 6.2x 5.7x 17.5x 7.8x 7.0x 5.8x 6.6x 18.5x 21.9x NM 5.6x 6.8x

3.3x 3.0x 7.2x 4.6x 3.6x 4.9x 2.5x 3.3x 12.4x 0.6x 2.6x 3.3x

Note: companies ranked by number of vehicles sold. Uses stock closing prices from Friday, August 24, 2012 and corresponding foreign exchange rates. Sources information from companies disclosure and at times CapIQ *Fiat Group includes 58.5% of financial values from Chrysler, given Fiats current ownership of Chrysler (not consolidated)

While a sum-of-the-parts valuation seems compelling (Fiat, Ferrari and Maserati are free if we fairly value the 58.5% stake in Chrysler), we believe the best way to value Fiat is by a proportional method, using either EBITDA or EBIT. Fiat has options to acquire the remaining 41.5% Chrysler stake it doesnt own, 40% of which has a strike price tied to Fiats own valuation. The remaining options have a fixed valuation given to Chrysler, which is great given the unexpected surge Chrysler is experiencing, surprisingly before its own aggressive product refreshing in 2013. A sum-of-the-parts valuation is unlikely to be actualized over the next few years, but a merger with Chrysler is very likely, thus we value Fiat on a proportional basis, by including 58.5% of Chryslers operations. Through re-launching the Alfa Romeo brand, cost savings on driving platform and parts commonality, we believe Fiat stand-alone EBIT will expand significantly from 0.6 billion in the last twelve months to 1.3 billion in 2013 (taking into account a weaker remainder of 2012) and 2.4 billion in 2014. Including a growing percentage of Chryslers EBIT, we estimate LTM EBIT of 2.1 billion will expand to 4.1 billion in 2013 and 6.5 billion in 2014, more than the current market capitalization. Importantly, this holds global selling volumes constant from Q2 2012, which especially hurts Fiats stand-alone operations as Italian auto sales hit a multi-decade low in the quarter. We believe it makes sense to estimate an abysmal selling rate in Italy for the foreseeable future. Table B: Key Higher-Certainty EBIT Drivers, Net Automotive Debt & Equity Valuation
( in millions)

EBIT Drivers Manufacturing Efficiencies Common Platform Savings New Alfa Romeo Contribution Chrysler Market Share Purchasing Savings Maserati Contribution Total Cumulative EBIT- Fiat EBIT- Chrysler
% of Chrysler Owned

LTM

2H 2012 150 21 0 137 340 0 649 649 837 2,998

61.8%

2013 380 93 97 653 314 52 1,589 2,237 1,319 4,105

68.5%

2014 380 224 636 833 314 93 2,479 4,717 2,446 5,457
75.1%

629 2,557
58.5%

Potential EBIT (w/ flat economy) Net Auto Leverage- Chrysler Net Auto Leverage- Fiat Net Auto Leverage- Proportional Shares Out Equity Value @ 6.8x Multiple

2,125 1,351 4,084 4,874 1,250 7.66

2,690 884 4,411 4,957 1,250 10.67

4,129 -377 4,817 4,559 1,250 18.82

6,544 -2,522 3,196 1,301 1,250 34.56

Please Note: These estimates are intended to show possibilities, not a direct projection. Realization of such projections are dependent on the company, the economy, commodities, and industry dynamics which cannot be projected with any certainty. These are estimates of the possibilities, given realistic, if not conservative assumptions.

Chryslers market share is being driven by an aggressive product refreshment that begins in the next few months with the new Ram 1500 pickup. Its exciting for Chrysler that even prior to this product rejuvenation, the company has been successfully taking market share across the lineup. It will be interesting to see the market response to the new Ram which will beat every competitor on fuel efficiency, increasingly the most important metric for buyers

consideration. The market share gains should continue as the entire Jeep and Chrysler lineup gets refreshed between 2013 and 2014. The EBIT drivers shown above assume no change in auto sales levels in the US over the period (from Julys 14.05 million annualized pace). Manufacturing efficiencies come largely from two sources: implementing best practices developed by Fiat at Chrysler factories, which will have a measured rollout, as well as reconfiguring existing Fiat facilities to drive down the time it takes workers to assemble cars. The company has consistently beat its projections, but displayed above are Fiats projections given at the 2010 investor day (click here for slide deck). Also, its important to note that while the Common Platform Savings line item may be far more conservative than the companys estimates, it assumes that Fiat will plow half of the savings back into more expensive and higher quality content. Thats been the customary practice of Chrysler, Ford and GM as they all have given new life to stagnant products. Margin expansion combined with reductions in net automotive debt drive the value of Fiats equity higher, assuming all potential drivers hit around our assumptions. Such a scenario of flat macroeconomics, fixed exchange rates and constant commodity costs is impossible, but given the current stocks undervaluation combined with a large margin of safety, should Fiats operations deviate negatively from these assumptions, we should still do fairly well over our medium-term time horizon. We also note that we use the current industry median EBIT multiple of 6.8x to show the debt-adjusted equity value of Fiat going forward, but nearly the entire auto industry trades at steep discounts to historical valuations. Even using this low level, the debt-adjusted equity value of Fiat will grow quite nicely over our typical holding period. Alfa Romeo, Chrysler and Lancia: A Changed Business Model Alfa, Chrysler and Lancia have been neglected brands over the past decade. If we take Alfa as a specific example: in recent quarters it has been selling just two models that have been updated in the last five years. One of the primary reasons has been the lack of unit scale to justify developing a diverse product line-up on its own. Both of the relatively fresh models share high-volume platforms with their Fiat-brand brethren, which helps reduce the upfront cost to developing the models. Management has estimated that up to 60-65% can be saved on engineering R&D and capital expenditures through sharing common platforms and production lines. The consulting firm Oliver Wyman assumed very similar levels in a 2005 report. Because all new Chrysler, Lancia, Jeep and Alfa Romeo models are being developed on common platforms, similar savings are achievable. This now allows Fiat to achieve rates of return in excess of 25% on invested capital with nearly every new product launch, with some new launches far higher (assuming a 3-year life of the particular model). Specifically, by our estimates, the weighted average return on invested capital of all seven new Alfa Romeo products coming will be 40-60%, as opposed to 10% to 0% without such savings, the variation being primarily the level of market acceptance for the new products. This combines the development cost savings, as well as modest savings on common parts with Chryslers vehicles. All of a sudden, the combined company makes Alfa, Chrysler and Lancia viable brands going forward. Chrysler gets much-needed cars and Fiat gets much-needed larger vehicles. Table C: Estimated Alfa Romeo Returns Using Estimated US & EU Sales
Model Mito Giulietta Giulia Fullsize 4C Spider SUV Total Brand Shared IRR -5.7% 81.4% 88.8% -11.2% -31.5% 16.3% 161.2% 48.4% Unshared IRR Shared Shared 4.7% -44.6% -56.0% -30.0% 36.0% -5.1%

Note: Assumes only US and EU sales as estimated in Chart 2 and 65% of total vehicle development costs are shared, as Fiat has guided

Given product launches in 2013, 2014, and 2015 we estimate Alfa will contribute an incremental ~100 million, ~600 million, and ~200 million respectively, to Fiat stand-alone operating profit (see the quarterly breakout of our base case scenario in Chart 1). This takes into account the showroom in Europe increasing from 2 to 7 products, and an introduction of the brand back to the United States, with a very modest market response as shown in Chart 2 (these estimates are below managements expectations, and we trust their market research more than ours). Importantly, it leaves out a very possible launch of Alfa in South America using Fiats significant dealer network, as well as the nearing launch of Alfa into China. Also importantly, this holds industry volumes constant in US and Europe, where Italy is currently 40% below mid-cycle auto sales levels. Should the US and Chinese launches go well (both cultures love Italian luxury brands), one can easily envision the brand adding an additional 1.5-2.0 billion or more to the companys operating profit (which is currently running just over 600 million at Fiat standalone). Chart 1: Incremental Operating Profit Contribution from Alfa Romeo Launches
#200# Rest#of#Europe# #150# Italy# US# #100#

#50#

#0# Q1#'13# Q2#'13# Q3#'13# Q4#'13# Q1#'14# Q2#'14# Q3#'14# Q4#'14# Q1#'15# Q2#'15# Q3#'15# Q4#'15#

!#50#

Source: GreenWood estimates based on most recent product launch timetable given by Fiat (see slide 25) and our own assumed profit margins of certain models.

Chart 2: Comparable 2011 US Sales of Key Competing Brands and Models to Projected Alfa Romeo Volumes (with Profit Impact Featured in Chart 1)
60,000"

50,000" Alfa" Audi" Porsche" 30,000" Volvo" InniK"

40,000"

20,000"

10,000"

0" Wagon/Hatch" Compact" Midsize" Fullsize" CUV" SUV" Specialty"

A Better Way To Run an Auto Business In our extensive meetings with most global automakers, and on investor calls, nearly every auto company continuously stresses the need to keep investing in new product development. By and large we agreed with this mantra, as Chart 3 demonstrates how impactful key vehicle refreshes and new launches are to a companys market share. Chart 3: Indexed Impacts to Product Refreshment on Selling Volumes
3.00#

2.50# Signicant#Refresh# 2.00# New#to#Market# Average#Refresh#

1.50#

1.00#

0.50#

0.00#
# 1# 5# 7# 8# 9# 10 # 11 # +# ch # un La un +# +# +# +# +# +# +# Be fo Be fo Be fo Be fo Be fo on +# +# +# ch # ch # ch # ch # ch # ch # ch # ch # ch # ch # un un un un un un un un un ch # M +# 12 # re # re # re # re # re # 2# 3# 4# th 6#

o#

o#

o#

o#

o#

ch #

La

La

La

La

La

La

La

5# M

4# M

3# M

2# M

1# M

un

La

La

La

un

Note: Includes nearly all major product refreshes and launches by the top seven automakers in the US over the past four years

The Japanese 3 or J3 (Toyota, Honda, Nissan) gained a tremendous share of the US market by keeping products fresher than Detroit rivals in the 1990s. At times, the product cycle was only one year shorter than domestic rivals, but this fresh product slowly and surely overtook the more stagnant vehicles in the market. So to invest, invest, then invest some more, appeared to be the smartest strategy, until one looks at the current environment in European compact cars. Because automakers face incredible resistance and condemnation the instant they mention the need to reduce their under-utilized manufacturing footprint in Europe, these companies have been forced to keep production lines open. As long as the selling price of the vehicle was above variable (component) costs, it made sense to continue producing vehicles in the factories they were unable to shutter. Naturally, this focus on pushing volume has led to nasty business practices (self-registration) and profits on certain vehicle segments (particularly in the compact segment where Fiat competes with the Punto against the VW Polo and Ford Fiesta) have converged to the vanishing point. Mr. Marchionne has admirably refused to invest in a successor to the Punto, as current margins in the European market would never pay back the needed investment to launch such a refreshed product. Fiat may lose temporary market share in this vehicle segment, but when automakers are reduced to making only a few euros above variable cost, do investors actually care about that kind

La

La

of market share? Of course not, and to the contrary, investors in other auto companies should voice their dissatisfaction at companies who invest in areas that will guarantee suboptimal returns (including electric vehicles), as we have with Renault (another of our deeply undervalued investments in the auto industry). Recent Scorecard: Whos A Better Operator? Chart 4: Recent Automotive Profit Margins by Key Regions

14.0%& 12.0%& 10.0%& 8.0%& 6.0%& 4.0%& 2.0%& 0.0%& !2.0%& !4.0%& !6.0%& !8.0%& Europe&

Fiat&

Ford&

GM&

Toyota&

N&America&

S&America&

Europe&

N&America&

S&America&

First&Quarter&2012&

Second&Quarter&2012&

Note: excludes luxury brands for Fiat, but includes such brands for competitors

While segment reporting earlier than Q1 2012 wasnt broken out geographically for Fiat, comparing these first two quarters to its far larger competitors demonstrates just how well Fiat is being run, even prior to significant costsavings to be achieved by integrating operations with Chrysler. The one segment with room for relative improvement is Chrysler in North America. Fiat has dedicated a lot of engineering, research & development expenses to Chryslers 2012, ahead of a fairly aggressive new product cadence that kicks off in the coming months with a new class-leading fuel efficient Ram pickup and Dodge Dart. Platform development for the new Jeep Liberty also happens to pay for platform development of SUVs to be launched under the Fiat, Alfa Romeo and Maserati brands. At the same time, these heightened ER&D expenses bring down the value that Fiat will pay for the next 3.3% slug of Chrysler, which it intends to buy from the UAW healthcare trust (VEBA) in the coming months. Furthermore, although Chryslers recent strength in the market can make one forget about the products it currently sells, Chrysler is achieving this recent solid performance with a very uncompetitive and unrefreshed product lineup. When viewed in this context, were quite happy with North American margins, even though they remain modestly below peers for the time being.

Chart 5: US Auto Market Fundamentals: Vehicles Sold vs. Implicit Demand*

20.0

18.0

Vehicles Sold
7.8mm Surplus

16.0

Millions'of'Cars'

Implicit Demand*
8.6 mm

14.0

De c it

12.0

10.0

8.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

*Implicit demand defined as annual cars scrapped (NADA Data) plus new licensed drivers in the year (FHA Data)

Only in recent months have vehicle sales in the United States started to catch up to implied demand. We estimate that pent-up demand created by scrapping more cars than were sold, and at the same time adding over 2 million new drivers to the road each year, to be between 8-9 million vehicles over the past five years. The pent-up demand is perhaps greatest in the pickup truck market, positioning the Detroit Three well for the coming catch-up in their most profitable segment. Incredibly, Chryslers market share has roared back at the same time its lineup is largely uncompetitive relative to its peers. Adding vehicles in segments that Chrysler currently is absent from, and refreshing key models like the Ram pickup and nearly the entire Jeep lineup should continue to drive Chryslers market share higher, even excluding product introductions by Fiat and Alfa Romeo. Chart 6: Chryslers Recent and Projected Market Share in the US
17.0%% 2010% 16.0%% 15.0%% 14.0%% 13.0%% 12.0%% 11.0%% 10.0%% 9.0%% 8.0%%
ar ch % e% ry % y% t% be r% No ve m be r% De ce m be r% Ap ril % Fe br ua Au gu s em be r% ry % ay % M Ju n ua Ju l Oc to Ja n M

2011%

2012%

2013%

2014%

Note: GreenWoods projections based on past performance of refreshed vehicles, and Fiats guidance on product launch timing

Se pt

Fixed Cost Absorption: a German Example Before Volkswagen built Audi into a behemoth global luxury brand, it was just a small niche luxury automaker. Volkswagen was long under-utilized capacity in Germany, and after Audis car platforms began sharing underpinnings with Volkswagens of similar size, filling the under-utilized capacity with Audi production easily spread fixed operating costs of factories across a broader number of vehicles. Now that Alfa Romeo can share large car and crossover platforms with Chrysler and Jeep, suddenly a faded brand gets a new lease on life. The Alfa Romeo Giulia will easily be able to be manufactured along side the next generation Chrysler 200 and Jeep Liberty. Theres one catch: Chryslers incredible renaissance has led to its own factories to become capacity constrained. Its Italys golden opportunity to capture some global Jeep production, in factories that can easily produce two to four times their current levels. Fiats plans to do such have been hindered by idiotic magistrates in Italy having authority to force Fiat to hire members of a communist union it doesnt have a labor agreement with. If Fiat cant gain operating certainty in Italy, the country will miss an important and symbolic opportunity to gain economic ground. While we would love to see Italian plants producing more Alfa Romeos and Jeeps, as Fiat investors, we will win in either scenario. Either the plants will begin producing Jeeps and Alfa Romeos next year, or the plants will be shuttered, thereby reducing current European operating losses. The Stealth Prius Effect Should private industry or government incentives roll out natural-gas fueling stations around the country (GE is currently working on a low-cost monthly financed version of a home filling station), we believe Fiat-Chrysler is poised to dominate this emerging market. Interestingly, since natural gas is often the marginal supplier of electricity in the US, filling a car up with natural gas will give the driver roughly the same fuel-cost savings that an electric car will, while saving $15-30k on a battery. Parity will only come if infrastructure is scaled up from the current sporadic footprint. Fiat has a roughly 80% market share of natural-gas-fueled vehicles in Europe. In Italy, where the government recently raised tariffs on gasoline, and has therefore widened the differential between Russian natural gas and gasoline, up to 15% of recent auto sales have been natural-gas fueled vehicles, as opposed to 0.5% of the market buying hybrids. Fiat has the no-brainer solution to Americas natural gas glut, and is going to start producing bi-fuel gasoline/ nat-gas Rams this fall. We hope they will soon follow with other vehicles, being the first brand to offer the lowest fuel-cost lineup. Chart 7: Power-Train Market Share of New Vehicle Sales in Italy
35.0%$

30.0%$

25.0%$

Government$ Incen>ves$
Nat$Gas$ Hybrids$

20.0%$

15.0%$

10.0%$

5.0%$

0.0%$

Source: ANFIA

9/ 1/ 09 $ 11 /1 /0 9$ 1/ 1/ 10 $ 3/ 1/ 10 $ 5/ 1/ 10 $ 7/ 1/ 10 $ 9/ 1/ 10 $ 11 /1 /1 0$ 1/ 1/ 11 $ 3/ 1/ 11 $ 5/ 1/ 11 $ 7/ 1/ 11 $ 9/ 1/ 11 $ 11 /1 /1 1$ 1/ 1/ 12 $ 3/ 1/ 12 $ 5/ 1/ 12 $ 7/ 1/ 12 $

Table D: Natural Gas Cars Economics is a No-Brainer: Gasoline Nat Gas Bi-Fuel* Dodge Dart MSRP Bi-Fuel Add-On Uncle Sam Kicker Net Price Fuel Costs Commercial Residential MPG / Battery Capacity Cost of 100-Mile Trip Driving Range Annual Variable Cost** Annual Depreciation Equipment Life Vehicle Battery 2nd Battery Total Annual Cost $3,001 $2,098
*Assumes if launched, would price at a similar add-on cost to Fiat automobiles in Italy **Assumes 15k miles driven per year

Electric Nissan Leaf $35,200 N.A. $7,500 $27,700 kWh N.A. $0.118 24 kWh $2.83 100 Miles $425 $3,333 15 Years 6.7 Years** 6.7 Years** $3,758

Dodge Dart $15,995 $1,500* $0 $17,495 gallon equivalent ~$2.00 $1.80 29 MPG $6.21 Unlimited $932 $1,166 15 Years

$15,995 $0 $0 $15,995 in gallons $3.744 N.A. 29 MPG $12.90 Unlimited $1,934 $1,066 15 Years

All of This For a Song Besides the mere fact that Fiat is currently headquartered in Turin (the name is an acronym for Fabbrica Italiana Automobili Torino, which means Italian Automobile Factory of Turin), theres almost nothing that isnt lovable about Fiat as an investment opportunity. Even better, the recent price happens to be even more compelling: love for sale. Even if Fiat was trading at more normalized valuation multiples (4-5x EBITDA or 7-9x EBIT, versus the current 2.5x and 6.6x using a proportional method of only 58.5% of Chryslers contribution), we think it would still be a good investment. The company has a clear trajectory to nearly triple operating profit margins from 3.4% to around 10%. This profit expansion (again, assuming a flat macroeconomic environment) will be coupled with de-leveraging in late 2013 and 2014 to propel the debt-adjusted equity value of Fiat significantly higher. Table E: Debt-Adjusted Equity Value Given Various Multiples: Year 2012 2013 2014 Net Debt 4,857 4,559 1,301 Pension 4,108 4,108 4,108 EBITDA 5,916 7,490 10,040 4.0x 11.67 17.03 27.79 5.0x 16.40 23.02 35.82 EBIT 2,690 4,129 6,544 7.0x 7.81 16.16 32.31 9.0x 12.11 22.79 42.78

Many notable investors have cherry-picked an automaker to add to their portfolios, as nearly the whole sector is trading at very reasonable levels. We think Fiat is the best investment, having been thrown out because of its historical ties to Italy. Those investors who like Ford or GM, you would do well to look at Fiat, as the current price is below the fair value of its stake in Chrysler and you get everything else for free. Even if the current valuation stays

at incredibly low levels, Fiats underlying operations will justify at least a tripling of value, if not more, over the coming years. As value-minded and contrarian investors, we appreciate the opportunity given to us by traders who are scared of their perception of uncertainty. The current travails of Italy and Europe will force an operational fix on the one weak spot of Fiat, thus we should welcome a difficult environment in Europe. After all, it took such an environment to get Detroit back into the ring, swinging for its life. In closing, well leave you with Mr. Marchionnes own words from a recent speech: "The hardest, the most difficult moments, when we feel lost and beyond hope are also the most meaningful at shaping our character. Because they ultimately change us forever. Those who survive, who find strength and the courage to stand and fight, will never be as before." -Sergio Marchionne Please email the author (swood@gwinvestors.com) if you have any questions or observations, particularly if they run contrary to our thesis. This article has been distributed for informational purposes only. Neither the information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not intended to provide personal investment advice, and it does not take into account the specific investment objectives, financial situation or particular needs of any person or entity that may receive this article. Persons reading this article should seek professional financial advice regarding the appropriateness of investing in any securities or assets discussed in this article. The authors opinions are subject to change without notice. Forecasts, estimates, and certain information contained herein are based upon proprietary research, and the information used in such process was obtained from publicly available sources. Information contained herein has been obtained from sources believed to be reliable, but such reliability is not guaranteed. Investment accounts managed by GreenWood Investors LLC and its affiliates may have a position in the securities or assets discussed in this article. GreenWood Investors LLC may re-evaluate its holdings in such positions and sell or cover certain positions without notice. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of GreenWood Investors LLC. Past performance is no guarantee of future results.