GM - General Motors

[PlanMaestro]

I never expected to say this but after its reemergence from bankruptcy General Motors looks very cheap. The history of Peter Lynch's investment in Chrysler in the early 80s, the investment that made Magellan, might be appropriate. There are also TARP warrants that seem mispriced.

 

P/S 0.22, P/E 6.3, $32B in cash and marketable securities with only $9B debt, all that for a marketcap of $34B. I have not gone through the cash flow details, the pension liabilities, accrued liabilities, or the product line-up but I imagine that others can jump on this.

 

Here are a couple of articles on the pent-up demand tailwind:

 

http://seekingalpha.com/article/605651-why-u-s-auto-sales-are-still-too-low?source=email_authors_alerts&ifp=0

http://www.economist.com/node/21548275

http://www.economist.com/node/17902837

 

[hyten1]

they do have a decent size pension obligation, but even with that i still think gm is cheap, i have a position in it

[beerbaron]

I have not checked GM but my gut would tell me that after the bankruptcy the pension liabilities were brought back to a realistic assumption. When a company is operating normally it can play around with numbers, but when in bankruptcy a lot of people ask questions and you are forced to take more realistic assumptions.

 

BeerBaron

[alertmeipp]

how's GM's product line compared for Ford and Chrysler?

 

 

[rogermunibond]

http://www.ft.com/intl/cms/s/0/99245856-a0c4-11e1-851f-00144feabdc0.html#axzz1vY1q8W3Y

 

FT had a piece today on GM's troubles in Euroland with Opel.

[17thstcapital]

Opel/Europe is a mess and likely will be so for a while.  Doesn't look like it will be easy for the company to get out of this mess. 

 

Pension + OPEB is around $25bn and will likely grow given low rates.....still very high but manageable given hefty cash balance. 

 

Looks like stock is trading at ~2x EBITDA.  Tarp warrants are attractive as is the mandatory convertible pfd which has a current yield north of 6%. 

[bargainman]

Do you know what the symbol for the preferred is? and the terms for conversion?  What about the warrants?  Thanks.

[17thstcapital]

Do you know what the symbol for the preferred is? and the terms for conversion?  What about the warrants?  Thanks.

 

Info on the warrants:

http://www.gm.com/company/investors/FAQs/Warrants.html

 

Pfd has a mandatory conversion on 12/1/13.  Quarterly dividend of $0.59375.  Shares vary depending on price of the common but below $33/sh on the common, pfd converts at ~1.51 shares of common per 1 pfd.  Ticker: GM-PB.

[PlanMaestro]

I guess we are finally hearing our engines roar.

 

Pent-up demand to lift US car sales

http://www.ft.com/intl/cms/s/0/0d7518a8-a5a2-11e1-a77b-00144feabdc0.html#axzz1vdTZyhIt

 

Much of the predicted increase is a result of the sharp fall-off in sales this time last year as manufacturers worldwide struggled with the inventory shortage following the March 2011 earthquake and tsunami in Japan. Analysts said the Japanese manufacturers Toyota and Honda will show the biggest rises, with Toyota sales on track to jump 90 per cent from May 2011.

....

 

Detroit manufacturers are set to be led once again by Chrysler, predicted to post an above 30 per cent sales rise. Ford and General Motors are also expected to post increases following last month’s declines.

 

But analysts said other factors were also lifting demand and setting sales on course for a yearly pace above 14m for the fifth straight month. Estimates compiled by Bloomberg show a seasonally adjusted annualised sales rate of 14.45m cars this month, compared with 11.8m in May 2011.

...

 

Kelley Blue Book noted that car sales accounted for half of the 2.2 per cent annualised growth rate in the first quarter – a contrast with the normal pattern of demand in a recovery.

 

“At this point, it is almost as if the tail is wagging the dog,” said Alec Gutierrez, a senior market analyst. “During a typical post-recession recovery, we would expect to see auto sector gains being driven by broad economic growth. In the first quarter, the opposite was true, as auto sales were the primary driver behind GDP growth and have consistently been a bright spot in an otherwise slow-paced recovery.”

 

[PlanMaestro]

Investors drawn to subprime motor debt

http://www.ft.com/intl/cms/s/0/e19f58ee-a50e-11e1-b421-00144feabdc0.html#axzz1vdTZyhIt

 

Sales of subprime motor debt are climbing in a sign that one key area of the consumer credit market is recovering from the financial crisis with investors attracted by higher returns in the current low-yield environment. Sales of bonds that pool subprime motor loans, or those to borrowers that are not considered “prime” with the lowest risk of default, are running at more than $7bn so far in 2012 versus $12.4bn for all of 2011, according to data from Barclays.

....

 

Subprime motor debt losses during the financial crisis were far less than those suffered by investors in subprime mortgage debt. (...) According to data from Fitch Ratings, losses for subprime motor bonds peaked at 12-14 per cent of the collateral pool. That compared with losses of up to 50 per cent in pools of bundled subprime home loans.

 

 

 

 

[TheEnterprisingInvestor]

I am conflicted about GM.  On the one hand the liabilities are more in line, it looks superficially cheap (not as cheap when the pension obligation is considered), and there's probably a lot of operating leverage there with the pent up demand.  On the other hand its still a tough business with bad management and a tough European situation.  I've considered the warrants for some time but just can't seem to get interested enough to buy them.  As an owner of AIG warrants, I can't say that the overhang of government ownership or GM's history that bothers me.  Part of it I guess is that I just can't figure out what the misperception is on GM and part of it is an aversion to owning bad, capital intensive businesses.  Maybe its just so cheap with such upside that I need to bite the bullet and buy the warrants, I don't know.  I'd be interested to hear some more  from investors who are long (or perhaps short).

[PlanMaestro]

Why you can still “See the USA in your Chevrolet”

http://www.economist.com/node/21534795?fsrc=scn/tw/te/ar/from0to100

 

Since then a steady stream of attractive small cars has begun to restore Chevrolet’s fortunes, such as the Cruze, now America’s best-selling compact. Improvements in quality and finish have also been seen across Chevrolet’s whole range, notes Joe Phillippi of AutoTrends Consulting. But its revamped small-car range is the key to cracking Chevrolet’s biggest American challenge: as with its Detroit rivals Ford and Chrysler, its cars sell well in the Midwest but poorly in the coastal cities, especially among the young: Chevy’s market share is 23% back home in Michigan but just 6% in California.

 

Drivers’ perceptions may not yet have caught up with the quality of Chevrolet’s new line-up. Steve Witten of J.D. Power, which measures consumer behaviour, says it can take ten years for buyers to respond to such improvements: despite Toyota’s recent recalls, a smaller share of buyers reject its cars on quality grounds than reject Chevys. Mr Witten says most customers quickly narrow their choices down to a shortlist of just three models, though there may be 15 that meet their requirements. A good brand image is what gets a car onto such shortlists. So Chevrolet’s anxieties about its current ad campaign, based around the ponderous slogan “Chevy Runs Deep”, are understandable.

 

A year ago Chevy sacked Campbell-Ewald, the Detroit ad agency it had used for 91 years, dumped its old slogan of “Like a Rock”, and launched the new campaign through Goodby, Silverstein of San Francisco. Last month a GM executive publicly lamented that some of the new agency’s ads had not been top-grade. Now the carmaker is launching a sweeping review of its marketing efforts worldwide.

 

[hyten1]

http://finance.yahoo.com/news/gm-announces-u-salaried-pension-170000670.html

[hyten1]

good summary of GM pension liability and asset

 

http://edge.media-server.com/m/p/e85ut6n4/lan/en

[PlanMaestro]

good summary of GM pension liability and asset

 

http://edge.media-server.com/m/p/e85ut6n4/lan/en

 

Thanks Hyten, very interesting information.

[PlanMaestro]

Americans discover easy lending when it comes to automobiles

http://www.washingtonpost.com/business/economy/americans-discover-easy-lending-when-it-comes-to-automobiles/2012/07/05/gJQAdTiVQW_story.html

 

But there’s another, less-noticed factor: Investors and private-equity firms are rushing to buy securities made up of bundles of car loans, seeing these assets as both safe and lucrative. In the first six months of this year, the nation’s largest auto lenders, such as GM Financial and Santander Consumer USA, have pawned off $10 billion of their subprime auto loans on investors, a 20 percent increase over the same period last year. That gives these lenders more capacity to loan to consumers with questionable credit histories and, in turn, helps drive auto sales even higher.

 

It may seem surprising that private-equity firms and other investors are willing to pour billions into auto-backed securities after getting burned by similar mortgage-backed securities when the housing bubble burst. But, analysts say, the auto market is different than housing in several key respects.

 

For one, Americans appear to be less willing to default on their car payments than to walk away from their houses — even in the depths of the recession, auto loans performed better than most. And, in the event of a default, it’s easier for a lender to repossess a car and sell it off, especially right now, when prices for used cars are so high.

 

Yet the fact that the subprime auto market is expanding so rapidly — with some buyers paying interest rates in excess of 10 percent — has led to some concern.

 

[Packer16]

I took a second look at GM and they appear cheap and not as capital intensive as in the past.  They only spent 4% or revenues on cap-ex and had EBITDA margins of around 8.6%.  The warrants (I bought the "B" warrants) appear to be a cheap way to play GM with some good upside leverage if GM's marlet cap doubles (which would put GM still at a discount to other multinational car firms).  With the car replacement cycle kicking in and an open financing market as desribed below, GM should be able to perform pretty well.  They also have some emerging markets exposure (about a 14% market share) to boot.

 

 

Packer   

[beerbaron]

I took a second look at GM and they appear cheap and not as capital intensive as in the past.  They only spent 4% or revenues on cap-ex and had EBITDA margins in excess of 20%.  The warrants (I bought the "B" warrants) appear to be a cheap way to play GM with some good upside leverage if GM's marlet cap doubles (which would put GM still at a discount to other multinational car firms).  With the car replacement cycle kicking in and an open financing market as desribed below, GM should be able to perform pretty well.  They also have some emerging markets exposure (about a 14% market share) to boot.

 

 

Packer 

 

They might run CapEx under their normalized rate. What's your estimate average CapEx for a car company?

 

BeerBaron

[PlanMaestro]

They might run CapEx under their normalized rate. What's your estimate average CapEx for a car company?

 

BeerBaron

 

The OEMs have been pushing the capital intensive activities to the suppliers for years. For example, Magna International can build a car almost by themselves, but they lack the distribution, brand and financing.

[PlanMaestro]

A Weight Hobbling G.M.

http://www.nytimes.com/2012/05/04/business/gm-profit-falls-but-surpasses-forecasts.html?pagewanted=all

 

Because the Treasury Department still owns a 26 percent stake in the company, G.M. remains saddled with pay restrictions that limit its ability to recruit new talent, a ban on corporate jets, and lingering image problems in the eyes of some consumers.

 

Company executives usually deflect questions about the effect of government ownership on their business, or their frustration with it. But in a rare interview on the topic, G.M.’s chief executive, Daniel F. Akerson, said he longs for the day that G.M. can finally say goodbye to its biggest shareholder.

 

“I try not to let it bother me,” Mr. Akerson said. “But the fact is it does bother me.”

 

The farewell celebration won’t be happening anytime soon. Based on G.M.’s current stock price of $22.37, taxpayers would lose an estimated $15 billion if the government’s shares were sold today. Unless the stock rose quite significantly, the chances are slim that the Obama administration would sell its 500 million shares before the November election and invite criticism from Republicans about the wisdom of the auto industry bailout.

 

Mr. Akerson said he has regular conversations with Treasury officials, but has never gotten guidance on when they intend to divest. “I don’t know what the government’s plan is,” he said. “I think it would be helpful if they would publicly state it.”

 

After pumping in nearly $50 billion to save G.M., American taxpayers owned about 60 percent of the company when it emerged from Chapter 11 in the summer of 2009. The government sold the bulk of its holdings at $33 a share in the company’s public stock offering a year later.

 

But the administration is not eager to sell the rest at a loss. “As with all of our investments, we try to balance the goals of maximizing taxpayer recoveries and exiting as soon as practicable,” said Timothy G. Massad, the assistant Treasury secretary overseeing the Troubled Asset Relief Program. “We don’t have a specific timetable, but we’ll continue to watch the market closely.”

 

Like partners in a three-legged foot race, both the company and the government are hobbled by their connection. Unless G.M. improves its performance and gets the stock price up, the government can’t sell without losing billions. At the same time, uncertainty about the government’s stake worries some investors and hurts consumer perceptions of G.M. cars.

 

In a survey last quarter of 30,000 Americans shopping for new vehicles, 32 percent of those who rejected a G.M. model said they would not consider buying from the carmaker because of the bailout.

While that is down from 59 percent in 2009, “G.M. still has quite a hangover,” said Art Spinella, president of the firm that conducted the survey, CNW Marketing Research of Bandon, Ore. “That’s a significant number of people who will buy something else because of the bailout.”

 

Chrysler, the other Detroit automaker to receive government aid, fared better in the most recent survey. The company paid off its federal loans last year, and just 22 percent of shoppers said they had avoided a Chrysler product because of the bailout.

 

Mr. Akerson said the negative feelings about G.M. were an unfortunate byproduct of the past struggles that led the company to seek government assistance.

 

“All we can do is put numbers on the board and hope people start to believe in our story,” he said.

 

Government ownership is also affecting G.M. internally. Mr. Akerson said the company has lost a half-dozen candidates for management jobs because of salary restrictions on companies getting TARP financing. G.M.’s search for a new head of human resources lasted months because several promising contenders balked at the uncertain time frame for the government’s exit.

 

The government’s ban on corporate aircraft is mostly a matter of inconvenience for Mr. Akerson and his senior staff members. He was stuck in a Paris airport for five hours last year after missing a connecting flight to China, and often spends an entire day traveling to remote factories for visits that last two or three hours.

 

“It is part of the deal,” Mr. Akerson said. “There’s no use complaining about it.”

 

He was more troubled by how G.M. had become, in his words, “a political football.” He still seethes about being called to testify before Congress in January about the safety of the Chevrolet Volt, which experienced battery fires after government crash tests. “I think the whole thing was politically driven,” he said.

 

Mr. Akerson also said he believed that politics were affecting the government’s decision to hang on to its G.M. stock. President Obama has been pointing to the turnaround at G.M. as a bright spot in the nation’s economy. But if Washington were to sell G.M. shares at a loss, the comeback story would be eclipsed by the cost to taxpayers for its rescue, he said.

 

“That’s why I don’t think they are going to sell in an election year,” Mr. Akerson said. “Right now, this is a positive for the current administration. If they sell it this year and don’t get all the money back, it’s not a positive.”

 

[Packer16]

In looking at most of the large multinationals (Damlier, Ford, GM, Hond and Nissan) the cap-ex is 3 to 5% of sales except Toyota where it is closer to 7 to 8%.

 

Packer

[CONeal]

I don't have a dog in this fight but keep in mind that the pickups will come out with a new body style in 2013.  Might get a little push from the diehards upgrading.

[CONeal]

One other thought, if as of today the gov't would lose 15 billion, why can't they just take the 10 billion gain from AIG and sell GM at $33 and breakeven between the two and be rid of the headache?

[Packer16]

Another way to look at GM is based upon seprating the net cash and the financing sub.  GM has net cash of $20 b for the auto co, net equity of $4.2b in its finance sub and $1.5 b in income from China JVs.  If the China JV is valued at 8x (the current mulitple of Tata) and the underfunded pension less tax shield and NOLs are subtracted along with the preferred the resulting non-operating assets value is $21.7 billion.  The total market cap is only $38 billion.  The resulting net market cap is $16.3 billion which over the past 2 years has generated on average $6.2 billion of FCF.  So GM is selling for a net of 2.5x FCF in a challenging economic environment.

 

I also reviewed the GM warrant terms and it appears they have the same anti-dilution terms as the TARP warrants but dividends can be issued with no change to the warrarts.

 

Packer     

[hyten1]

for the auto enthusiast the new ATS from Cadillac is coming

 

http://www.autoblog.com/2012/07/19/cadillac-kicks-off-ats-marketing-with-new-global-video-series/