GM - General Motors

[CorpRaider]

Probably goes without saying that timing could be viewed as suggesting annoyance with another negatively impacted quarter and a desire to dump the EU ops, but I suppose we will see.  It is not likely they are under some illusion that they have a passive board/investor base.

[Dalal.Holdings]

Probably goes without saying that timing could be viewed as suggesting annoyance with another negatively impacted quarter and a desire to dump the EU ops, but I suppose we will see.  It is not likely they are under some illusion that they have a passive board/investor base.

 

They've lost money in Europe for over 15 years, considered a sale in 2009. With pulling Chevy fully out of Europe (i.e. No more Chevy/Opel combo dealerships), GM may have been carving out the Opel business from the rest of its operations for many years for such a sale opportunity. It would be great if other automakers (i.e. Fiat) jump in for Opel and trigger a bidding war.

 

Seems like a good decision as GM really only makes money in North America and China. Will reduce overall capex and stay true to management wanting returns on capital to exceed 20% (as opposed to being negative like it has been in Europe).

 

Europe could also be headed for a disaster with recent Brexit and possible election of Marine Le Pen which could lead to Euro breakup. GM smart to exit (if they get a good price) by selling out now instead of under distress.

[CorpRaider]

I hope you're right.  Hopefully, they get some offers from people who can navigate Europe better and therefore find the assets of greater value. 

 

The cynic in me feels like an exit from the market by GM could signal a turning point in the European economy, auto sales figures, and (perhaps even more likely) the relative currency valuations.

[rsmehta]

Does anyone have any idea on the price here??

 

 

    Does GM seperate out book value for their Opel division?

[RadMan24]

No, but they added disclosure regarding the China business in the latest 10k, which is way more valuable.

 

GM has spent over a $1 billion trying to restructure European operations, and they spend over a $1 billion in capex a year. Profitability remains elusive and it's almost breakeven.

 

A reuters article http://www.reuters.com/article/us-opel-m-a-psa-confirm-idUSKBN15T1G0 brought up some interesting points - Chinese partners are becoming more adapt at producing smaller cars; european regulations are making small cars sold there expensive; and GM has shown a philosophy of moving capital to productive and attractive opportunities rather than chasing sales lead.

 

If this sale goes through, the benefit really is that it frees up capital and stops draining resources into a tough market. Of all the GM thesis' out there, European going breakeven was often the best hope. Eliminating the business all together could be a positive if you think about it.

 

Does anyone argue that maintaining the Opel business is worth it?

[jeffmori7]

Does that mean European would lose the Ampera-e (Bolt EV) before they get it? How does that work in those cases, they could be shared platform for specific models?

[Dalal.Holdings]

Ampera (old one was volt clone) was never that popular in Europe. Likely if an acquisition occurs, there will be some agreement for GM to continue to provide platforms/certain vehicle models for a number of years.

 

This article is good:

https://www.wsj.com/articles/ditching-opel-is-next-step-in-gm-ceos-profit-drive-1487083422

 

"Auto executives have generally held that adding business breadth through consolidation could help them better allocate capital. But Ms. Barra has said margins outweigh market share and—unlike many of her peers—has shunted growth opportunities when the business case is murky."

 

Barra is superior to auto execs Marchionne and Ghosn in our view (contrary to the opinion of many). The future will have no room for the traditional old boys club of auto execs who want to grow, grow, grow volume and scale. Let Nissan/VW/etc battle it out for "world largest automaker by volume" and let GM go where the profits are and avoid the rest. Just look at what a waste of capital Europe, South America, SE Asia, and Russia were/are.

[muscleman]

Ampera (old one was volt clone) was never that popular in Europe. Likely if an acquisition occurs, there will be some agreement for GM to continue to provide platforms/certain vehicle models for a number of years.

 

This article is good:

https://www.wsj.com/articles/ditching-opel-is-next-step-in-gm-ceos-profit-drive-1487083422

 

"Auto executives have generally held that adding business breadth through consolidation could help them better allocate capital. But Ms. Barra has said margins outweigh market share and—unlike many of her peers—has shunted growth opportunities when the business case is murky."

 

Barra is superior to auto execs Marchionne and Ghosn in our view (contrary to the opinion of many). The future will have no room for the traditional old boys club of auto execs who want to grow, grow, grow volume and scale. Let Nissan/VW/etc battle it out for "world largest automaker by volume" and let GM go where the profits are and avoid the rest. Just look at what a waste of capital Europe, South America, SE Asia, and Russia were/are.

 

 

"Barra is superior to auto execs Marchionne"? How come?

At least the stock price in the past four years doesn't agree with you.

[Dalal.Holdings]

"Barra is superior to auto execs Marchionne"? How come?

At least the stock price in the past four years doesn't agree with you.

 

Well, for starters, Mary has only been CEO for 3 years (not 4). The first year or two were dogged by a recall scandal that started soon after she took over and involved, among other things, huge fines and grilling of Barra in front of congress (from which she emerged largely unscathed). The stock price didn't do so great during that time for obvious reasons.

 

The biggest reason she is superior (as alluded to in the WSJ quote) is pursuit of profits, margins, and returns on capital over volume. Auto CEOs traditionally seek growth of volume/sales. This leads to incentive discounts, fleet sales, and globe conquering mergers that make them huge organizations with far flung operations (many of which operate at losses or at best razor thin margins). It's no secret that auto is a capital intensive industry (yet hilariously, execs like Marchionne focus on flawed metrics like EBITDA--Charlie Munger has a word for EBITDA--Google it), and so robust capital allocation is very important but hardly prioritized by auto execs. It's also no secret that auto is a cyclical industry. Anyone who sells cars at thin margins when the market is healthy is doomed to be burned when the cycle turns (you could look at an automaker's margins along the lines of the investing concept "margins of safety" in that it provides downside protection). This was exactly what happened to old GM (which blew up when the cycle turned in 2008) and Barra's management has led to a full reversal from that strategy. Other auto execs in the meantime seem to be following the same boom and bust playbook of the past.

 

Some reading that we view as required reading for GM investors (hearing this stuff from management makes us salivate):

 

https://www.bloomberg.com/news/articles/2015-09-28/gm-s-dog-ate-my-homework-must-end-barra-says-as-recall-fades

 

Barra has made progress in trying to shape the company around profits. More than a decade ago, executives at GM used to wear pins with “29” on them -- representing the company’s target U.S. market share percentage. They chased it even as profits fell. The old GM didn’t even track which cars made money, according to President Dan Ammann, a key player in the cultural overhaul.

 

http://ww2.cfo.com/strategy/2015/12/the-road-ahead-general-motors/

 

Chuck Stevens (CFO):

The product-line profitability and the ability to look at returns on invested capital at a product-line or country level are a natural bridge to robust capital allocation, to ensuring that we’re deploying our shareholders’ capital where it’s going to generate appropriate returns.

[CorpRaider]

In fairness, it seems she got that from hanging with WEB and more importantly from the shareholder base/activists who came in and told GM management what appropriate goals/metrics were.  In my opinion she does, however, deserve full credit for "getting it" and being open to those influences.

[Dalal.Holdings]

In fairness, it seems she got that from hanging with WEB and more importantly from the shareholder base/activists who came in and told GM management what appropriate goals/metrics were.  In my opinion she does, however, deserve full credit for "getting it" and being open to those influences.

 

It's more likely she got it from someone else: Theodore "Tim" Solso who was Chairman of GM (and is currently lead director of the board) played a big role in helping groom Mary for the CEO role. Solso was CEO of the industrial company Cummins in the early 2000s and helped revitalize the company with a focus on return on capital and large share buybacks (go look at the share price of CMI in the early 2000s to see the results). Cummins was smaller and easier to turn around than GM has proven to be, but it seems a similar strategy is being employed.

 

https://www.wsj.com/articles/SB10001424052702304851104579361210926045486

 

http://www.autonews.com/article/20131230/OEM02/131229929/incoming-gm-chairman-solso-made-tough-calls-as-cummins-ceo

 

This sounds a lot like what GM is doing in Europe (and did in Russia, SE Asia, etc):

 

In 2001, about a year into his tenure as CEO of then-struggling Cummins Inc., Tim Solso did the unthinkable: He axed one of the two U.S. heavy-duty engine platforms under development, one in which the company had invested nearly three years and tens of millions of dollars.

 

"To kill an engine platform at Cummins back then, it was like a sacred cow," says Jean Blackwell, who was then a vice president at the diesel engine maker. "Tim's message was: 'We need the right cost structure, and the customers have to want it.' People weren't used to hearing that."

 

[CorpRaider]

Interesting info.  I thought I remembered Harry Wilson and co. had a chat with management about returns on (and of) capital rather than growing sales and a "fortress balance sheet" with turrible ROEs.  Thought there was a standstill (or informal equivalent thereof) that stipulated something about return based goals for management.  But now that you mention it, I really only clearly remember the "fortress balance sheet"/don't horde capital stuff.  I wasn't aware of the Cummins influence.  I don't suppose it matters where she got religion, but is interesting nonetheless.

[dbuch]

This may already be posted in this thread somewhere but seems to support a plateauing SAAR level. There are 264M vehicles in operation and the average age is 11.6 years. scrap rates move up significantly after 11 years but even assuming a flat 4.5% gets you to 12M SAAR. The vehicles in operation are expected to grow 1.4% a year which adds another 3.5M SAAR. This would peg a neutral SAAR at 15.5M units which will continue to grow over time. With break-even levels closer to 10-11M versus the old 15M, it seems GM should be able to stay profitable through the cycle. If we enter a recession and SAAR drops to 10-11M units GM breaks even or maybe burns a little cash (they have $20B for such an occasion) but the demand should snap back given the 3.5M VIO growth. Of course risks are less cars per household, much longer vehicle lives, new competition or irrational competition etc etc.

 

 

http://www.automotive.ventures/vehicles-operation-vio-hits-264m-units-new-record/

http://www.prnewswire.com/news-releases/an-increase-of-vehicles-in-operation-fuels-growth-opportunities-for-sensors-in-automotive-industry-300375394.html

[Steven B]

Will selling Opel affect their production expenses elsewhere?

[Steven B]

This may already be posted in this thread somewhere but seems to support a plateauing SAAR level. There are 264M vehicles in operation and the average age is 11.6 years. scrap rates move up significantly after 11 years but even assuming a flat 4.5% gets you to 12M SAAR. The vehicles in operation are expected to grow 1.4% a year which adds another 3.5M SAAR. This would peg a neutral SAAR at 15.5M units which will continue to grow over time. With break-even levels closer to 10-11M versus the old 15M, it seems GM should be able to stay profitable through the cycle. If we enter a recession and SAAR drops to 10-11M units GM breaks even or maybe burns a little cash (they have $20B for such an occasion) but the demand should snap back given the 3.5M VIO growth. Of course risks are less cars per household, much longer vehicle lives, new competition or irrational competition etc etc.

 

Just want to point out that the break even number depends heavily on current mix staying the same. Even a small shift can be substantial.

[atbed]

Something something voting machine something something weighing machine.

 

Cheer up and don't abandon the principles of value investing. The company reduced shares outstanding by 27M last qtr with around $1B. There's $3B remaining in the old authorization which they plan on completing in 2017. My guess is they'll do it a quarter early (like last year) and finish by Q3 2017, meaning 27M a qtr at this rate. Then, the new $5B authorization will kick in.

 

Right now, GM trades at a P/E < 6 of trailing twelve month earnings (and probably close to 5 at forward earnings). Toyota is at 10, Honda is at 15. Even Ford trades at a P/E of 10 and Volkswagen which is mired in an emissions mess is close to 8.

 

GM is certainly better than F and VW. The market P/E is close to 20. The valuation is certainly ludicrous, but Mr. Market can go crazy.

 

Thanks, Dalal.Holdings. Exactly. Market is going crazy on GM for some time. I still hold tight and keep my position at GM but I'll be honest, each quarter these guys beat the forecast and stock is flat at best, the chances GM will breakthrough one day is diminishing. I guess, we'll all agree for now that Market is going crazy about peak auto for no reason. It is perfectly fine to assume at least flat US auto sales for a number of years but then the question becomes if Market does not value GM when the times are good, what will happen when the times are not that good (recession etc.). It is a matter of time. We all know it'll happen sometime. We just don't know when. I still hope for the best on this name but cannot see how the stock will break this negative sentiment loop in the market. I still hold the position but not as much optimistic anymore I guess. Tepper gave up on GM a couple of quarters ago, on the other hand Einhorn increased significantly last quarter...

 

I have been holding this since 2012. Sometimes I feel like it will take a recession for valuation to increase. I don't want one, but maybe investors need to see how GM performs in a downturn.

 

[Spekulatius]

Will selling Opel affect their production expenses elsewhere?

 

Yes it would -  a lot of platforms are shares and I think GM us uses some engines from Opel and such. separating Opel would not be easy and there are no natural buyers either - maybe Fiat?

 

I think they would have to hand over Opel for free with some dowry added in to get rid of it.

[CorpRaider]

You don't think PSA is a natural buyer?  I was surprised to read the reports in the WSJ that they are already meeting with German gov't officials.  Seems like they have a semi.

[Dalal.Holdings]

I have been holding this since 2012. Sometimes I feel like it will take a recession for valuation to increase. I don't want one, but maybe investors need to see how GM performs in a downturn.

 

Cummins (CMI) is a good example to look at. It too was a cyclical capital intensive business whose stock simply bobbed up and down with cycles -- until Tim Solso took over in January 2000. For the first 3.5 years of Solso's tenure, the stock didn't move much from its $9.50 price where Solso took over (and at one point declined by more than 33% from that point).

 

Once his initiatives of focusing on margins, returns on capital, and properly executed buybacks took hold, the stock never looked back (went to trade over $100 when he retired in 2011 and trades at over $150 per share today). I guess those first 3.5 years must have been frustrating to many.

 

Barra has been at GM (under Solso's influence) for about 3 years now. GM is certainly a larger ship than CMI was and went through a tough recall scandal, but it's hard to argue against the fact that business results are improving every year (and on GAAP figures, not those "adjusted earnings" touted by FCAU).

 

Moreover, many analysts and investors treat this as another auto company, but we feel that this CEO, like Solso and unlike just about every other auto CEO, prioritizes capital allocation. Capital allocation is an essential skill of CEOs that is often neglected, especially in an industry like auto. CMI demonstrates what happens when robust capital allocation is executed from the top of a cyclical and industrial company.

 

Long story short, this shouldn't have to be said on a value investment board, but try not focusing on the stock price so much and look more at the business.

[tylerdurden]

I have been holding this since 2012. Sometimes I feel like it will take a recession for valuation to increase. I don't want one, but maybe investors need to see how GM performs in a downturn.

 

Cummins (CMI) is a good example to look at. It too was a cyclical capital intensive business whose stock simply bobbed up and down with cycles -- until Tim Solso took over in January 2000. For the first 3.5 years of Solso's tenure, the stock didn't move much from its $9.50 price where Solso took over (and at one point declined by more than 33% from that point).

 

Once his initiatives of focusing on margins, returns on capital, and properly executed buybacks took hold, the stock never looked back (went to trade over $100 when he retired in 2011 and trades at over $150 per share today). I guess those first 3.5 years must have been frustrating to many.

 

Barra has been at GM (under Solso's influence) for about 3 years now. GM is certainly a larger ship than CMI was and went through a tough recall scandal, but it's hard to argue against the fact that business results are improving every year (and on GAAP figures, not those "adjusted earnings" touted by FCAU).

 

Moreover, many analysts and investors treat this as another auto company, but we feel that this CEO, like Solso and unlike just about every other auto CEO, prioritizes capital allocation. Capital allocation is an essential skill of CEOs that is often neglected, especially in an industry like auto. CMI demonstrates what happens when robust capital allocation is executed from the top of a cyclical and industrial company.

 

Long story short, this shouldn't have to be said on a value investment board, but try not focusing on the stock price so much and look more at the business.

 

I own GM since 2014. I don't necessarily agree with you on this. GM has proven itself regarding managing difficulties very well particularly in US and China and even SA so far. Luck was with them too after the ignition switch scandal, if I have to be honest. The drop in gas prices and resulting shift in terms of the mix was a huge support but at this point market does not care. As much as I want to ignore whatever market thinks, I have to take into consideration at some point. I am talking about not daily, monthly, quarterly moves. For last 3-4 years EPS increased big time but the "peak auto" story is keeping people at the sidelines so if GM makes 7usd this year, will that make any difference about this perception? It feels like the investors are desensitized regarding the earnings of GM because of this fear that they will be the ones who will hold the bag when the auto sales go down. I don't expect any auto recession any time soon but sometimes perception becomes the reality. At the end of the day, I have to sell GM to other investors who will think they will also make money by investing in GM but I don't see how there will be significant demand for GM above 38- 40 usd levels. That's the levels we came back for the last several years anyways. You have to keep in mind that this is a cyclical business at the end of the day. There will be a downturn at some point and if no one buys GM when the company performs really well, during a downturn who will stick with it anyways? Therefore I agree with the previous comment that GM will probably have to prove itself in a downturn as well to get respect from the market. I wish I am wrong but it certainly looks like the reality with GM to me these days. Mary Barra said all these investments in driverless, sharing EV etc. can someday change how this company is valued. I agree. That could be a catalyst but that sounds like not any time soon...

[Dalal.Holdings]

Reports of $2B valuation of Opel...GM and PSA trying to wrap deal up by end of next week. Barra moving fast, fast, fast

 

https://www.bloomberg.com/news/articles/2017-02-17/gm-psa-said-to-value-opel-at-2-billion-as-deal-talks-advance?cmpid=yhoo.headline

[fareastwarriors]

GM Dials Up Profit-Sapping Pickup Discounts as Rivals Gain

 

https://www.bloomberg.com/news/articles/2017-02-27/gm-dials-up-discounts-on-pickups-as-rivals-tread-on-truck-turf

[RadMan24]

If GM's truck ATPs are going up, does that not alleviate the issue?

[fareastwarriors]

Peugeot Reaches Deal to Buy European Brands From General Motors

 

 

https://www.bloomberg.com/news/articles/2017-03-04/peugeot-said-to-reach-deal-to-buy-opel-brand-from-general-motors

[gokou3]

Official PR for deal:

 

PSA:

http://media.groupe-psa.com/en/press-releases/group/opelvauxhall-join-psa-group

 

GM:

http://www.gm.com/mol/m-2017-mar-0306-opel-vauxhall.html

http://media.gm.com/content/dam/Media/gmcom/investor/2017/mar/GM-Investor-Presentation.pdf