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Peter Lynch

Chrysler
1982-1987
Industry: Cars
Category: Cyclical/Turn Around

Context
US-made car sales slumped 20% y/y in 1980.
North American car industry was wilting under (1) high oil prices, (2) loss of market share to oversea manufacturers, (3) 10%+ inflation.

Why the Company is Mispriced
A poorly managed cyclical, loaded with debt problems, on the brink of bankruptcy.

Alternative View
Chrysler was in a cyclical so far down that people thought it would never come back.

Government bailed out Chrysler through a 1.4b loan, giving the company maneuver room.
Lynch saw Chrysler had 1b in cash, recently sold off it's tank division to GD for 336m, for a total of 1.3b in cash.
Chrysler was losing a small amount of money at the time, but between the ~1.3b cash and the favourable loan structure, Chrysler was not going bankrupt.

Lynch spoke with the legendary Lee Iacocca
(side-note: John Bernthal plays him in Ford v. Ferrari)
Iacocca made a strong case for the auto industry revival
Chrysler began cutting costs, making major improvements in manufacturing, changing the car line-ups
If you believed the auto industry was coming back, that Chrysler had made major improvements and had become a low-cost producer, you could be confident in Chrysler's survival
It wasn't as risky as it looked from the newspapers.

"At the time I bought Chrysler, if everything went right, I thought I could make 400%. If everything went wrong, I could lose 100%.
This is something you had to recognize going in. As it turned out, I was pleasantly suprised and made 15x on it."

Result
Chrysler was a turnaround play at $2, at $5, even at $10
Along the way, the company bought back shares and warrants

Lynch started to buy at $6 in early 1982.
It went up 5x in less than 2 years (124% CAGR) and 15x in 5 years (75% CAGR).

Lynch no longer saw it as a turnaround at $48 in mid-1987.
The debt was paid, rot cleaned out, and Chrysler was back to being a solid, cyclical auto company
At these prices, it was difficult to see a 10x

Notably
In the early 1980s, Chrysler's shares were selling for $2 because it's survival was in doubt.
People who were daring enough to buy it at $2 made 20x, but they could have lost everything.
I waited until Chrysler got a cash infusion from the government bailout.
By then, the shares were selling at $6 and Lynch made many multiples on his money.
Chrysler turned around quickly, but most big companies don't turn it around as fast.
It may take decades, it may not happen at all.
Navistar, General Motors, Sears, Avon, Bethlehem Steel all didn't come back.
The first challenge is to figure out who is going to survive long enough to wor kout it's problems.
Big companies are more likely to get loans and have assets they can use.
Small companies are less likely to have these benefits.
That's where large companies have an advantage over small ones.
If auto sales had been robust and Chrysler managed to not sell cars, Lynch would've ben pessimistic.
But the entire industry was in a slup and due for a rebound.
Lynch visited their HQ, saw new cars, talked to executives, said it was the most important day in his 21-year career.
Interviews that were supposed to last 3 hours stretched into 7. Another chat with Lee Iococca lasted another 2 hours.
Lynch was convinced that Chrysler had the wherewithal to stay in business and that the company was putting pizzazz into it's products.
The Dodge Daytona, Chrysler Laser, G-124 Turbo.
Convertibles for the younger crowd, sportier New Yorkers.
Iacocca was most excited about "the first new thing in the auto industry in 20 years", the Chrysler minivan.
Lynch was more excited about the cars than the minivan, but it turns out the minivan saved the company.
No matter how well you think you understand a business, something can always happen that will surprise you.
Ford let Lynch to Chrysler, which later led him to Subaru and Volvo.
Note to self: read Iaccoca's books