str8shot Posted February 12, 2016 Share Posted February 12, 2016 Munger's two cents on GM from his DJCO annual meeting on Feb 10, 2016 - not his favorite industry to invest in: http://www.bloomberg.com/news/articles/2016-02-10/berkshire-s-munger-says-gm-faces-brutally-competitive-market This Munger quote from a Valuewalk excerpt from the same meeting - on BRK's investment in General Motors: “That’s simple. GM is in the Berkshire portfolio, because a young man who works for Warren likes it, and Warren lets them do what they please. When he was a young man, Warren didn’t like when old men told him what he couldn’t do. So he refrains from that with our young men. I haven’t the faintest idea why he likes it. Maybe it is cheap and there’ll be another god damn government bailout. The industry is too competitive. Everyone relies on the same suppliers, and cars last long time with little service, and leases of cars are all at cheap rents. This has the earmarks of a commoditized and difficult market and will shrink one of these days. If I was investing, I would want something way the hell better than others, and that’s hard to find.” More and more I'm compelled to invest in really good businesses at a fair price versus fair businesses at a good price, which can end up being value traps. Link to comment Share on other sites More sharing options...
Picasso Posted February 12, 2016 Share Posted February 12, 2016 It was interesting to watch Pabrai's face as Munger made those comments. Just a kick in the nuts. Link to comment Share on other sites More sharing options...
coc Posted February 12, 2016 Share Posted February 12, 2016 Munger's two cents on GM from his DJCO annual meeting on Feb 10, 2016 - not his favorite industry to invest in: http://www.bloomberg.com/news/articles/2016-02-10/berkshire-s-munger-says-gm-faces-brutally-competitive-market This Munger quote from a Valuewalk excerpt from the same meeting - on BRK's investment in General Motors: “That’s simple. GM is in the Berkshire portfolio, because a young man who works for Warren likes it, and Warren lets them do what they please. When he was a young man, Warren didn’t like when old men told him what he couldn’t do. So he refrains from that with our young men. I haven’t the faintest idea why he likes it. Maybe it is cheap and there’ll be another god damn government bailout. The industry is too competitive. Everyone relies on the same suppliers, and cars last long time with little service, and leases of cars are all at cheap rents. This has the earmarks of a commoditized and difficult market and will shrink one of these days. If I was investing, I would want something way the hell better than others, and that’s hard to find.” More and more I'm compelled to invest in really good businesses at a fair price versus fair businesses at a good price, which can end up being value traps. Just want to make it clear to everyone that this is not what Charlie actually said, and I think that's a bit of a misrepresentation of what he said. There's more nuance. There's nothing about a "god damn bailout." Here's what he actually says: I haven't the faintest idea why that young man (Weschler) likes General Motors. It is true that General Motors is statistically cheap and it may be protected by the federal government in the end, so it may be a very good investment. But the auto industry is as brutally competitive as I have ever seen it. Everybody knows how to make good cars. Everybody. And they all rely on the same suppliers. And the cars last a very long time with very little service. And everybody leases them at cheap rents, and has all kinds of incentives. It just has all the hallmarks of a very difficult, commoditized, super-competitive market, so, I don't think the auto industry is going to be a terribly easy place to get rich. And it may even shrink one of these days. In other words, this culture of everyone having three or four cars could actually shrink. And so I think the auto industry is not a cinch. If I were investing in the auto industry, I would want some place that I felt was way the hell better a competitor than the others, and that's hard to find. Link to comment Share on other sites More sharing options...
goldfinger Posted February 13, 2016 Share Posted February 13, 2016 I am not in GM as I am not fond of that business for different reasons but I think Munger's arguments could be applied directly or indirectly to other businesses at BRK and: - The love for 3 to 4 cars or more per family is a USA thing and the car market is global. In other nations families usually own 1 or 2 cars max. One business that could get affected if americans buy much less cars is Geico actually... - Because of health awareness, love for soda sellers (sugar, diet and other chemical waters of any kind) could suddenly disappear (same with all kinds of fast food)... That could also make the survivors completely commoditized as the psychological appeal of certain brands could be destroyed. - Even if americans buy less cars they will still love trucks, SUVs and big cars. They will skip on the other types of cars. - Luxury car businesses and certain brands have some kind of durable competitive advantages. Link to comment Share on other sites More sharing options...
str8shot Posted February 15, 2016 Share Posted February 15, 2016 I am not in GM as I am not fond of that business for different reasons but I think Munger's arguments could be applied directly or indirectly to other businesses at BRK and: - The love for 3 to 4 cars or more per family is a USA thing and the car market is global. In other nations families usually own 1 or 2 cars max. One business that could get affected if americans buy much less cars is Geico actually... - Because of health awareness, love for soda sellers (sugar, diet and other chemical waters of any kind) could suddenly disappear (same with all kinds of fast food)... That could also make the survivors completely commoditized as the psychological appeal of certain brands could be destroyed. - Even if americans buy less cars they will still love trucks, SUVs and big cars. They will skip on the other types of cars. - Luxury car businesses and certain brands have some kind of durable competitive advantages. low gas prices have driven SUV demand and should these prices rise later this year/2017 that could adversely impact demand. and we know that the auto industry is cyclical and very capital intensive, as is typically the case with commodity businesses, which makes it more challenging to achieve outsized returns. continual recalls are another unattractive feature. Pabrai has stated that because the trend of growing demand for vehicles, he liked GM and FCAU because they'd come out of bankruptcy and had better capital structures. GM is executing pretty well but right now the market is hating on the auto industry. my point is other things equal, why invest in crappy industries where you can seemingly find great values? Pabrai sold PKX at a sizable loss and got taken to the woodshed on ZINC. and while GM is simply out of favor, these are all crappy industries. the recent Pabrai pick that has done well is Google. Because it was a no brainer. Link to comment Share on other sites More sharing options...
LR1400 Posted February 15, 2016 Share Posted February 15, 2016 I am not in GM as I am not fond of that business for different reasons but I think Munger's arguments could be applied directly or indirectly to other businesses at BRK and: - The love for 3 to 4 cars or more per family is a USA thing and the car market is global. In other nations families usually own 1 or 2 cars max. One business that could get affected if americans buy much less cars is Geico actually... - Because of health awareness, love for soda sellers (sugar, diet and other chemical waters of any kind) could suddenly disappear (same with all kinds of fast food)... That could also make the survivors completely commoditized as the psychological appeal of certain brands could be destroyed. - Even if americans buy less cars they will still love trucks, SUVs and big cars. They will skip on the other types of cars. - Luxury car businesses and certain brands have some kind of durable competitive advantages. low gas prices have driven SUV demand and should these prices rise later this year/2017 that could adversely impact demand. and we know that the auto industry is cyclical and very capital intensive, as is typically the case with commodity businesses, which makes it more challenging to achieve outsized returns. continual recalls are another unattractive feature. Pabrai has stated that because the trend of growing demand for vehicles, he liked GM and FCAU because they'd come out of bankruptcy and had better capital structures. GM is executing pretty well but right now the market is hating on the auto industry. my point is other things equal, why invest in crappy industries where you can seemingly find great values? Pabrai sold PKX at a sizable loss and got taken to the woodshed on ZINC. and while GM is simply out of favor, these are all crappy industries. the recent Pabrai pick that has done well is Google. Because it was a no brainer. Did higher oil prices adversely affect SUV and truck sales? My assumption is not as much as I would think. Link to comment Share on other sites More sharing options...
LR1400 Posted February 15, 2016 Share Posted February 15, 2016 I am not in GM as I am not fond of that business for different reasons but I think Munger's arguments could be applied directly or indirectly to other businesses at BRK and: - The love for 3 to 4 cars or more per family is a USA thing and the car market is global. In other nations families usually own 1 or 2 cars max. One business that could get affected if americans buy much less cars is Geico actually... - Because of health awareness, love for soda sellers (sugar, diet and other chemical waters of any kind) could suddenly disappear (same with all kinds of fast food)... That could also make the survivors completely commoditized as the psychological appeal of certain brands could be destroyed. - Even if americans buy less cars they will still love trucks, SUVs and big cars. They will skip on the other types of cars. - Luxury car businesses and certain brands have some kind of durable competitive advantages. I don't know about fast food and soda, I think the revolt against it is overblown. Fast food restaurants are packed every time I drive by one, it seems. I think the "organic, healthy thing" is a bit of a fad. It's certainly not a revolutionary game changer like say the Internet or social media was. People in general are still getting fatter (in the US), and healthy living is no guarantee to a long healthy life. I've run across more than one person who has had lung cancer recently that never smoked, didn't work in construction, didn't deal with asbestos, etc. Link to comment Share on other sites More sharing options...
Shooter MacGavin Posted February 16, 2016 Share Posted February 16, 2016 Charlie Munger is a genius and extremely experienced. You should pay closer heed to his words over mine obviously and be completely skeptical of GM. In fact, I don't disagree with anything he says about the auto business. It's absolutely a commodity business, except in the North American Pickup Truck market which is a weird little pocket that only really exists in North America, has been dominated by the Detroit 3, and has proven to be very hard to penetrate for foreign OEMS. Assuming the auto cycle is over-heated, and all the other negative horrible things that are going to happen because of subprime auto financing and whatever......surely that $1.52 annual dividend payout is still worth something. It's not worth zero right?. From a credit point of view, GM is a pretty decent credit at least with very little straight debt and $40B of liquidity available so they can fund that guy for a long time, no problem. Therefore, what value would you place on the future with GM's earnings financing an ever increasing dividend (through buybacks, and dividend increases)? 100% of unencumbered earnings are going towards paying down Europe legacy liabilities, dividends and buybacks. Mgmt believes next year's (not the same thing as a full cycle obviously) earnings are going to be $5.50 at the midpoint, and personally I think its hard for them to not do even better, so what's that worth? If the market overall is paying 14x for S&P earnings growing 5-6% and paying a 2-3% yield, sure it should pay at least 7-8x for GM's which will grow 5-10% on buybacks alone with a 5% dividend yield, if you thought the average full cycle earnings was half of the $5.50 EPS. Or said differently, GM is worth at least 14x $2.75 EPS. That still makes GM a $38-$44 stock today vs. the $27 quote. However, for me, here's the punchline with GM: 1) At a steady SAARs, outside of buybacks, GM's earnings per share will continue to grow for the next few years by free'ing up capital, not reinvestment. That's what they say, but how do we know they'll be successful? Easy, look at Ford as the pioneer of the unified platform strategy. GM is on the same path as Ford and Ford's EBIT margins improved meaningfully in North America as a result of consolidating its platforms. This is a far less risky way to grow earnings than anything else. No reinvestment required, no need to take share. Just be a little more efficient by using less materials, having less parts, and spending less time producing too many models. 2) Noone here is taking about the truck story much. GM is as much a bet on a housing recovery as are the home builders. Pickup truck sales go up when more homes are being constructed. They're strongly correlated. You need pickup trucks to move construction materials to and from new home construction sites. And pickup trucks sales are not only below cycle because home construction is below household formation, but pickup trucks on the road are older on average than cars on the road. And they're among the highest margin segment of the auto market, especially GM and Ford, who don't do much volume in luxury. In fact, new pickup truck sales, I believe, make up ~100% of consolidated profits for both GM and Ford. If GM 1) free's up capital by unifying platforms and putting in less materials in newer vehicles (adds 10-15% to earnings), 2) have trucks sales that increase to a normal level in line with new home construction (adds ~15-20% to earnings) and 3) aggressively does repurchases (5-10% to EPS per year). then that's the whole story right there. That means in a few years, at the current SAARs, you'll have EPS at $7 - $9 or something like that? You're getting that for 4-5x FY16 earnings. Yes there's underfunded pensions that may or may not need further capital calls, yes china is slowing down, yes SA sucks and on the plus side, yes they'll be profitable in Europe which is far below trend, yes they'll get better net pricing over the next 3 years as they replace all these old models, GM financial will be more profitable as the exclusive captive financing arm....blah blah blah. Sure people culturally want to own less cars per household, that's a headwind as older people die off and younger people get to driving age. All of that other stuff is whack-a-mole....but the GM balance sheet is solid, the liquidity is very high, the cash flow is high (ex-litigation crap which should be resolved this year hopefully), and the stock is cheap enough (4x P/E ex DTAs), that you don't need a lot to go right as long as a lot doesn't go wrong. A little can go wrong, and you should still do better on the stock than most other S&P stocks. Oh and btw, I personally think the subprime story for autos is overblown (used cars aren't the same beasts as houses), but that's a post for another day, but I believe GM Parent is not a guarantor for GM Financial's securitized credit. GM Financial does have a credit line with the GM Parent in case there is ever again a drying up of the securitization market. Link to comment Share on other sites More sharing options...
fareastwarriors Posted February 18, 2016 Share Posted February 18, 2016 GM’s Finance Arm Runs Online Bank German Opel subsidiary accepts consumer deposits to lower car-financing costs http://www.wsj.com/articles/gms-finance-arm-runs-online-bank-1455827145 Link to comment Share on other sites More sharing options...
fareastwarriors Posted March 4, 2016 Share Posted March 4, 2016 Leasing of Light Vehicles Sets Record in February Nearly a third of cars sold were leased, keeping monthly payments down http://www.wsj.com/articles/leasing-of-light-vehicles-sets-record-in-february-1457121978 Link to comment Share on other sites More sharing options...
tylerdurden Posted March 8, 2016 Share Posted March 8, 2016 Satire on auto industry analysts: Auto Stock Analysts: Talking Points Memo http://www.lumegroup.com/blog/autoanalmar16.html The auto world is changing and who better than a Wall Street Analyst at forecasting where it will go? A good (i.e. popular) analyst reads existing investor sentiment and uses it to formulate his price targets by anchoring to current price. Cheap valuation doesn't matter any more (i.e. GM, Ford): value is what you pay, not what you get. We must hold the stocks we cover under vastly different standards: expect Great Recession II for GM and Ford, expect great things for TSLA. "Cheap valuation doesn't matter any more", " New entities such as "catalysts" and "momentum" are the fuel of the modern equity security." Some words of wisdom on a value investing board... I really don't have any idea about your purpose is on this board. Link to comment Share on other sites More sharing options...
Nnejad Posted March 8, 2016 Share Posted March 8, 2016 ... He's quoting the article which is a "satire on auto industry analysts". Keep up the good work, Dalal! Link to comment Share on other sites More sharing options...
tylerdurden Posted March 8, 2016 Share Posted March 8, 2016 ... He's quoting the article which is a "satire on auto industry analysts". Keep up the good work, Dalal! Oh ok. Well, I guess personally I don't need much satire on anything related on GM these days. I just need the stock price go up; that's all... I stopped listening the equity analysts long time ago anyways... Link to comment Share on other sites More sharing options...
fareastwarriors Posted March 8, 2016 Share Posted March 8, 2016 Used-Car Prices Fall, Pressuring Auto Makers Low gasoline prices and demographic shifts are limiting appeal of sedans, compacts on the retail market http://www.wsj.com/articles/used-car-prices-fall-pressuring-auto-makers-1457458571 Link to comment Share on other sites More sharing options...
Jurgis Posted March 8, 2016 Share Posted March 8, 2016 Used-Car Prices Fall, Pressuring Auto Makers Low gasoline prices and demographic shifts are limiting appeal of sedans, compacts on the retail market http://www.wsj.com/articles/used-car-prices-fall-pressuring-auto-makers-1457458571 Purely anecdotal: a friend was looking at used Camrys last week. It seemed the prices are ~10% or more up from what I paid two years ago. Maybe prices dropped compared to last year, but longer term they don't seem to be down. Link to comment Share on other sites More sharing options...
oddballstocks Posted March 8, 2016 Share Posted March 8, 2016 Used-Car Prices Fall, Pressuring Auto Makers Low gasoline prices and demographic shifts are limiting appeal of sedans, compacts on the retail market http://www.wsj.com/articles/used-car-prices-fall-pressuring-auto-makers-1457458571 Purely anecdotal: a friend was looking at used Camrys last week. It seemed the prices are ~10% or more up from what I paid two years ago. Maybe prices dropped compared to last year, but longer term they don't seem to be down. Anecdotal as well, truck prices are up over a few years ago as well. In general all used car prices are up. In 2009 I paid $6k OTD for a five year old Malibu with 40k miles. Currently a five year old Malibus with 80k miles (twice what I purchase at) are listed for $9-10k. Link to comment Share on other sites More sharing options...
fareastwarriors Posted March 14, 2016 Share Posted March 14, 2016 Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales High level of missed payments for such loans made recently has raised concerns about underwriting standards http://www.wsj.com/articles/subprime-flashback-early-defaults-are-a-warning-sign-for-auto-sales-1457862187 Link to comment Share on other sites More sharing options...
Dalal.Holdings Posted March 15, 2016 Share Posted March 15, 2016 Subprime Flashback: Early Defaults Are a Warning Sign for Auto Sales High level of missed payments for such loans made recently has raised concerns about underwriting standards http://www.wsj.com/articles/subprime-flashback-early-defaults-are-a-warning-sign-for-auto-sales-1457862187 How will this affect the automakers? The article says that the vast majority of these loans are for used cars and that the automakers' own financing arms have higher lending standards. A vehicle is a depreciating asset. No one buys multiple cars to rent or "flip". A vehicle makes up a small portion of an individual's net worth (compared to a home). A vehicle can easily be repossessed in the event of default. The subprime auto market is under intense scrutiny by the press, regulators due to the close proximity to the subprime mortgage crisis (recency bias). We know that real crises occur in areas where no one is paying attention... Link to comment Share on other sites More sharing options...
racemize Posted March 15, 2016 Share Posted March 15, 2016 WSJ on the Cruise Automation: Terms of GM’s pact with Cruise weren’t disclosed. According to people familiar with the matter, the deal is valued north of $1 billion in cash and stock. Cruise, founded in 2013 by a 20-something entrepreneur with venture backing, has raised $20 million and was recently valued at less than $100 million. More from fortune: http://fortune.com/2016/03/11/gm-buying-self-driving-tech-startup-for-more-than-1-billion/ This is some horrendous capital allocation. If they used stock at these levels, while buying it back--I just don't know what to say... Link to comment Share on other sites More sharing options...
nikhil25 Posted March 16, 2016 Share Posted March 16, 2016 I thought that was insane as well! WSJ on the Cruise Automation: Terms of GM’s pact with Cruise weren’t disclosed. According to people familiar with the matter, the deal is valued north of $1 billion in cash and stock. Cruise, founded in 2013 by a 20-something entrepreneur with venture backing, has raised $20 million and was recently valued at less than $100 million. More from fortune: http://fortune.com/2016/03/11/gm-buying-self-driving-tech-startup-for-more-than-1-billion/ This is some horrendous capital allocation. If they used stock at these levels, while buying it back--I just don't know what to say... Link to comment Share on other sites More sharing options...
tylerdurden Posted March 16, 2016 Share Posted March 16, 2016 It doesn't look good when you pay $1B+ when the business was valued $100M very recently for sure but perhaps this was a very valuable piece in terms of their driverless car game and they had to pay this price because of a bidding war or something. Hard to know the dynamics of the transaction but if this is going to help them become a major player in driverless game, perhaps it is not that outrageous. At the end of the day if you don't have this capability, any auto company can be destroyed in 10-15 years. Perhaps it was live or die type of investment for them in their defense... Link to comment Share on other sites More sharing options...
Guest neiljgsingh Posted March 16, 2016 Share Posted March 16, 2016 It doesn't look good when you pay $1B+ when the business was valued $100M very recently for sure but perhaps this was a very valuable piece in terms of their driverless car game and they had to pay this price because of a bidding war or something. Hard to know the dynamics of the transaction but if this is going to help them become a major player in driverless game, perhaps it is not that outrageous. At the end of the day if you don't have this capability, any auto company can be destroyed in 10-15 years. Perhaps it was live or die type of investment for them in their defense... I'd like to think this is true, and Chuck Stevens has been phenomenal as CFO, but the fact that they paid 10x recent valuation in an undoubtedly hot tech VC market with bloated valuations is a bit scary. As big guys like Fido and BlackRock write down some of their late-stage investments in fantastic companies like Dropbox and Snapchat (among many others), the VCs are surely looking to be net sellers in the fear of contagion leaving them with illiquid investments through the next downturn. GM was willing to buy, but was that smart? Was this a unique opportunity to act, or did they just get lured in by some fancy VC pitch? Spark Capital was a major early-stage funder, and they're geniuses (see their investments here: http://sparkcapital.com/companies/). Same thing with Y Combinator. Hate to say it but if strong VC players who understand tech better than pretty much anyone think this thing is worth $100m, and GM of all people says I'll pay 10x that, whose guess do you think is closer to IV? I understand the hypothesis that this was a "live or die type" of deal, but unless this starts a spree of traditional automakers buying speculative startups for double-digit multiples of private market value, I'd say GM jumped the gun here. But honestly, the fact that they used undervalued stock as a currency is probably the most asinine part of this whole thing. Only consolation is that they only spent $1bn instead of 5 or 10, I guess. Link to comment Share on other sites More sharing options...
racemize Posted March 16, 2016 Share Posted March 16, 2016 I think Sergio's comments on autonomous driving were spot on (essentially, that people better at it will figure it out and provide the solution)--and paying $1 billion for some 20 year olds using stock at these levels... Ridiculous. Link to comment Share on other sites More sharing options...
tylerdurden Posted March 16, 2016 Share Posted March 16, 2016 Well, I agree it doesn't look good but the value of an asset could be different for different buyers as well. Perhaps, as a strategic investment this was more valuable to GM with their other investment/partnership in Lyft; that could be why they paid more than financial investors. Impossible to know for us their exact thinking. Based on what they say they are impressed with the solutions this company can find and GM is not a firm which is clueless in terms of driverless technology either. Anyways, I can not say they did not overpay for sure but there are always different perspectives to any issue. that's what I'm trying to get at. Are they really 20 year olds by the way? Nobody over 20 over there :-) Link to comment Share on other sites More sharing options...
RadMan24 Posted March 17, 2016 Share Posted March 17, 2016 GM has how much cash and we're worrying about a $1 billion purchase? You gotta think that those stock awards have miletones, and if met, will likely mean the investment is worth north of $300 million. So, over the next few years, can they use the platform and add to it and increase its overall value? I imagine so. I'm not worried, I find it better than the position VW is in.,. Link to comment Share on other sites More sharing options...
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