GM - General Motors

[rishig]

I am still scratching my head on GM. It sounds like your price target would be $40-45, so why bother buying at $30? ::)

How would you view Fiaty compared with GM?

GM has low leverage and potentially lower returns and lower risks, right?

 

Here are my numbers for GM:

 

Shares outstanding: 1,685 million

Stock price: 30

Market cap: 50.5$ billion

Cash & Equivalents: $30 billion

Debt (including prefs): $10 billion

Net Cash: $20 billion

Enterprise Value: 30.5$ billion

 

Sales (current):

North America: $100 billion

Europe: $20 billion

International: $20 billion

South America: $16 billion

Total: $156 billion

 

EBITDA margin:

North America (current): 12%

Europe (2016-2017): 0%

International (current): 15%

South America: 5% current but projected to weaken going forward. Assume 0%

 

EBITDA:

North America (current): $12 billion

Europe: 0

International: $3 

South America: 0

Total: $15 billion

 

Capex:

5% of revenue on a run-rate basis (based on recent investor day comments)

 

Cash Taxes: ~1 billion

 

Normalized FCF: $6.5 billion

Normalized FCF yield: 20%

 

Current FCF: $4 billion

Current FCF Yield: 13%

 

Why not include underfunded pension in the enterprise value calculation? As per pension regulations, GM is not required to make any additional contributions for a few years. And management does not expect to make any additional contributions. Further as commented in the thread here, every 1% move up in discount rate wipes out ~8$ billion of pension liability. Discount rate in 2006 was 5.9%. If we go back to 5.9%, this would wipe out ~20$ billion in liability.

 

On a run-rate basis, in another 5 years, GM would generate at least $4 billion x 5 years = $20 billion in FCF. Add that to current cash of $30 billion and you get the entire market cap in cash (they do plan to pay out higher dividends).

 

The downgrade by the JP is totally irrelevant to the thesis in my opinion. We aren't making any assumptions about margin growth, sales growth. We are assuming Europe stops losing money but at the same time we are assuming that South America goes from making money to no money. I think of this as a 1-2 foot hurdle (don't lose market share, stable ATP, stable SAARs), not 6 feet hurdle. Whatever way one looks at this, I think it is cheap.

 

If management manages to do half of what they claim, FCF goes up due to operational leverage. As per management comments, at this point, additional margin dollars will drop straight to bottom line. But that's just the sizzle on the steak.

 

Low case: 6.5 billion FCF + discount rate stays where they are today + net debt of $10 billion

Multiple: 8x

Enterprise Value: $50 billion + $50 billion cash - $10 billion debt - $25 billion pension = $65 billion

Upside: 30%

IRR: 5%

 

Base case: 6.5 billion FCF + discount rate same as 2006 (pension liability: 5$ billion) + net debt of $6 billion ($4 billion prefs bought out)

Multiple: 10x

Enterprise Value: $65 billion + $50 billion cash - $6 billion debt - $5 billion = $105 billion

Upside: 100%

IRR: 15%

 

[muscleman]

Thank you rising.

I think an IRR of 5-15% is too low for me.  :P

[tombgrt]

Good overview rishig, I have equal numbers in mind.

 

Thank you rising.

I think an IRR of 5-15% is too low for me.  :P

 

Well you do get a 4% dividend that will grow while waiting. Downside should be very low over a few years time unless they do some stupid things with their cash. Or you can buy the B warrants and in a best case scenario you could get an IRR of almost 35% over 4 years ($60 stock). I'm laying of leverage at the moment but if the market corrects further I'll be glad to pick some warrants up.

[Picasso]

The point of investing in GM is not to make 5-15 percent a year.

 

The point is, even if the business does not do well in the future you are still likely to turn a tidy profit. It's that cheap. But if one of a few, or all, catalysts happen you will make a lot more than 20 percent a year. Tails you lose, heads I win.

 

The problem is, people think the probability of those catalysts are fairly low. That is what is probably important to focus on here.

[rishig]

Thank you rising.

I think an IRR of 5-15% is too low for me.  :P

 

The low case is extremely low probability in my opinion. Most likely scenario is better than base case fcf  on normalized basis. IMHO, margins at NA will expand by 150-200 bps and sales will continue to grow in China.

 

With warrants b and higher than base case fcf will generate north of 20% irr.

 

 

[EliG]

The low case assumes:

- no additional pension contributions for a few years

- no change in discount rate

 

Is it really the low case? What happens in deflationary scenario? Won't the rate go down? Can it trigger additional contributions?

[mvalue]

Has anyone wondered why so many automakers are so cheap? Fiat and GM are discussed here, but a highly intelligent person just walked me through all the pieces of VW you back out to see that it is an extremely low multiple as well. Given the widely-held view about the renewed health of the industry, what is the reason for this?

[EliG]

Has anyone wondered why so many automakers are so cheap?

Industry overcapacity combined with high capital requirements. A round of consolidation would help.

[karthikpm]

Marchionne was talking about consolidation

 

http://www.autonews.com/article/20141008/OEM02/141009795/marchionne-foresees-merger-creating-a-new-no.-1-automaker

[rishig]

The low case assumes:

- no additional pension contributions for a few years

- no change in discount rate

 

Is it really the low case? What happens in deflationary scenario? Won't the rate go down? Can it trigger additional contributions?

 

From 2013 10-K underfunded pensions breakdown:

U.S. hourly and salaried	$6,552
U.S. nonqualified	$762
Total U.S. pension plans	$7,314
Non-U.S.	$12,542
Total underfunded	$19,856

 

Comments about underfunding from VIC GM writeup by JRSteelers:

 

On US pension deficit:

The GAAP and hypothetical termination calculations are overly near-term focused.  In July 2012, the U.S. government enacted legislation known as “MAP-21” which allows pension plan sponsors such as GM to adjust the interest rates used to calculate its pension liabilities and therefore its current funding ratio and required contributions. GM can now use a band of +/- 15% in 2013, +/-20% in 2014, +/-25% in 2015 and +/-30% in 2016 of 25-year average corporate rates rather than simply using 24-month average corporate rates.  GM will have no federal requirement to contribute capital to its hourly retiree pension plan through 2017 based on GM’s calculations, and so New GM has flexibility with respect to its pension plan. MAP-21 does not impact GM’s GAAP accounting for its pension deficit.  Misperceptions about the pension deficit will persist through 2017. 

 

On non US pension deficit:

The largest plans are in Canada, Germany and the UK.  While the U.S. historically required funding pension plans on a ratio of 80% assets to funding target, not all countries have required pension funding levels.  An example, Germany-based Volkswagen has domestic projected benefit obligations of $30bn against assets of $9bn or a deficit of $21bn.  Further, it is likely that pension obligations do not pierce through to New GM, and New GM is shielded from these deficits.  Further, it’s likely that each of GM’s foreign subsidiaries are funded with cash from New GM on a secured basis, and these unsecured pension obligations are junior to New GM’s capital.  It is appropriate to exclude the Non-U.S. pension deficit from enterprise value because these obligations do not have mandatory contributions or reach up into New GM.

[compounding]

Has anyone wondered why so many automakers are so cheap?

Industry overcapacity combined with high capital requirements. A round of consolidation would help.

 

Have you checked utilization rates in the U.S. lately? Many are running over 100%. Are you suggesting this will change? In Europe it's a bit different and quite a few are rationalizing, but much smaller market (ie not as important) and recovery of demand is likely to happen at some point. In China most need new capacity to keep up with growing demand.

 

It's an interesting question. Hyundai, Ford, Renault, and almost BMW are others that have hit 52w lows recently.

[beerbaron]

I would say that part of the undervaluation comes from the real possibility that the conversion to electric vehicle will accelerate. Tesla and byd taking much of the pie.

[wisdom]

US will have 17 million car sales.

 

Tesla will not even have 50,000 car sales in 2014. While electric cars will gain market share, it is not a threat at this time to the industry. Eg. a recent goal set was to have 30% of all cars be electric by 2030.

[beerbaron]

US will have 17 million car sales.

 

Tesla will not even have 50,000 car sales in 2014. While electric cars will gain market share, it is not a threat at this time to the industry. Eg. a recent goal set was to have 30% of all cars be electric by 2030.

 

It might start to happen sooner than that, look at Tesla walking circle around it's competitors. EV and Self Driving Cars are disruptives technology today's leader has nothing to do with tomorrow.

 

BeerBaron

[merkhet]

The $6.5 billion of FCF that someone mentioned above is too low if you figure NA gets to a 10% pre-tax margin by the time we hit 2016 -- as Mary Barra has indicated she's targeting.

 

If NA margins hit 10% and Europe is no longer negative by 2016, keeping everything else the same, you'll get to almost $5 per share of earnings and/or FCF by 2016.

[compounding]

US will have 17 million car sales.

 

Tesla will not even have 50,000 car sales in 2014. While electric cars will gain market share, it is not a threat at this time to the industry. Eg. a recent goal set was to have 30% of all cars be electric by 2030.

 

It might start to happen sooner than that, look at Tesla walking circle around it's competitors. EV and Self Driving Cars are disruptives technology today's leader has nothing to do with tomorrow.

 

BeerBaron

 

There are a couple of counterpoints that I can think of off the top of my head, others can surely contribute with more. Even if we assume that a large part of the market will be EV's, how do you determine if there is a first-mover advantage? The base-rate probability for new car companies taking a large chunk of market share is very small.

 

And then there's the problem with that first assumption; why EV's and not natural gas? Or even fuel-cell? And again, why so sure the incumbents will be disrupted? They are all working on EV, fuel-cell, automated cars etc, in more or less scale.

 

 

[EliG]

Have you checked utilization rates in the U.S. lately? Many are running over 100%. Are you suggesting this will change? In Europe it's a bit different and quite a few are rationalizing, but much smaller market (ie not as important) and recovery of demand is likely to happen at some point. In China most need new capacity to keep up with growing demand.

 

Two counterpoints:

 

1. They may be running 100% in the US, but do they have any pricing power? Can they clear dealers' lots without offering incentives?

2. Auto OEMs are global players. They may be running 100% in the U.S. at the moment. That doesn't mean that global overcapacity is not an issue.

 

Fiat F-1 filing:

 

"Competition, particularly in pricing, has increased significantly in the automotive industry in recent years. Global vehicle production capacity significantly exceeds current demand, partly as a result of lower growth in demand for vehicles. This overcapacity, combined with high levels of competition and weakness of major economies, has intensified and may further intensify pricing pressures."

 

KPMG Global Automotive Executive Survey 2014:

 

Page 48: Overcapacity remains a challenge

 

http://i.imgur.com/h4gbYm0.png

 

[compounding]

Have you checked utilization rates in the U.S. lately? Many are running over 100%. Are you suggesting this will change? In Europe it's a bit different and quite a few are rationalizing, but much smaller market (ie not as important) and recovery of demand is likely to happen at some point. In China most need new capacity to keep up with growing demand.

 

Two counterpoints:

 

1. They may be running 100% in the US, but do they have any pricing power? Can they clear dealers' lots without offering incentives?

2. Auto OEMs are global players. They may be running 100% in the U.S. at the moment. That doesn't mean that global overcapacity is not an issue.

 

Fiat F-1 filing:

 

"Competition, particularly in pricing, has increased significantly in the automotive industry in recent years. Global vehicle production capacity significantly exceeds current demand, partly as a result of lower growth in demand for vehicles. This overcapacity, combined with high levels of competition and weakness of major economies, has intensified and may further intensify pricing pressures."

 

KPMG Global Automotive Executive Survey 2014:

 

Page 48: Overcapacity remains a challenge

 

http://i.imgur.com/h4gbYm0.png

 

1. I'd say some segments have pricing power (trucks/luxury/premium) and some don't. There was a chart in the article you posted on the topic of price increases. They talked some about this at GM's recent investor day, and Pabrai has spoken about US trucks as a sort of franchise, if you want other points of view and data. The profit margins of these segment seem to support this analysis.

 

2. Thanks for posting the survey, I hadn't read it before. As I said Europe is challenging, but Italy had the worst level of sales since he beginning of he seventies last year. Sustainable? And the other countries aren't exactly at the top of the cycle either.

 

Of course overcapacity is a risk, but a large part of the thesis in GM and Chrysler is that they are in much much better shape in terms of cost structure and organisation post re-org. Frankly, I would be more concerned if the executives weren't worried about overcapacity. That they are worried about overcapacity is not evidence of overcapacity. An issue generally with the survey was that almost all of it was just forecasting.

 

And if you look at Fiat-Chrysler they are using under-utilised factories in Europe to export premium/luxury vehicles until Europe starts looking better. You make it sound like being global is a negative? I am of diametrically opposed opinion.

 

 

[intothebreach]

Just catching up on this whole thread after (finally) getting intrigued due to the negative headlines + existence of warrants.

 

I can perhaps add a little context on the industry as a former employee of two Tier-1 suppliers, one Japanese (very remote subsidiary of Toyota) and as a Plant Manager in another US-based. Both sold directly to GM.

 

For those not familiar with the industry, I would suggest threading carefully. Aside from a few exceptions such as the airlines, the auto industry has got to be one of the most dysfunctional industries around, and my personal belief is what we are currently seeing at GM in terms of recalls is just a reflection of "inbred" management (in the sense of always having been in this one industry) coupled with a certain complacency/arrogance  and a focus on short-term results (granted this last one being fairly widespread).

 

A few examples come to mind: way back when Saturn first launched, GM were reinventing the automobile and its manufacturing, with a ground-breaking partnership with its unions (and of course, new materials), then promptly proceeded to never renew the Saturn line-up (after adding a few more models, the last one an Opel rebranding), leading to its eventual demise. Almost 10 years back, I remember attending a GM Purchasing function where we were told by the person in charge that GM had learned its lessons, and that it was about to undergo a "product-lead revolution". Following which, it kept focusing mostly on rebates, marketing and fleet sales.

 

Add to this the dual structure of the industry where the manufacturers' and the dealers' interests are far from being aligned (which I believe constitutes one of Tesla's major competitive advantages), the massive reinvestment costs that are easily pushed back a few years when convenient. The MASSIVE amount of capital destroyed in ill-fated scale/platform acquisitions and divestures. No wonder both Daimler and Cerberus failed to do anything worthwhile with Chrysler before it ended up with Marchionne. And also that it took an ex-Boeing guy to prevent Ford from ending up in the same spot as GM. What significant innovation came or are coming from the US auto manufacturers these days (other than Tesla)? Google is the one pioneering the self-driving cars, the electric car was developed by the Japanese first, even Ford's MyTouch is going to be leapfrogged by Apple even though it launched years before...  I am surely missing some, but all in all far from being very reassuring as a shareholder.

 

That said, I have absolutely no insight on the new CEO, other than what I view as a few positives to compensate for being an industry insider (a woman CEO in an industry run by men should be good news, and what seems to be a willingness to clean up the recalls board).

 

As you can tell, I'm not exactly a fan of either GM or its industry, but as headlines continue pushing prices lower, I'm getting more and more intrigued. Berkshire may have bought in, but this is certainly not one wonderful businesses that you hold forever.

 

Edit: corrected typo in Opel and missing plurals

[nikhil25]

GM Sued for $10 Billion Over Losses on 27 Million Cars

http://www.bloomberg.com/news/2014-10-15/gm-sued-for-10-billion-over-losses-on-27-million-cars.html

 

General Motors Co. (GM) was hit with its biggest lawsuit so far over serial recalls, brought on behalf of drivers of 27 million vehicles seeking more than $10 billion in compensation for fallen car prices.

 

The would-be class action against GM aims to represent everyone who bought or leased a recalled car from July 2009 to July 2014 and still owns it, or sold it after mid-February when the recalls started, or had an accident that destroyed it after that date.

 

According to the suits, 2010 and 2011 Chevy Camaros lost $2,000 in value as a result of recalls. The price drop of the 2009 Pontiac Solstice is $2,900.

 

Common is down to $28ish

[fareastwarriors]

General Motors’s Third-Quarter Global Sales Increase 2%

 

Auto Maker Posts Best Third Quarter Since 1980; Sales in China Improve 14%

 

 

http://online.wsj.com/articles/general-motorss-third-quarter-global-sales-increase-2-1413384493?mod=WSJ_hp_LEFTWhatsNewsCollection

[fareastwarriors]

Class-Action Case Accuses G.M. of Neglect Beyond Ignition Switch

 

 

 

http://www.nytimes.com/2014/10/16/business/class-action-case-accuses-gm-of-neglect-beyond-ignition-switch.html?src=busln

[xazp]

Tesla's #1 advantage (and it is huge right now) is their battery technology means they can get higher ranges at lower prices than anyone else.  Last year, they were probably half the cost of anyone else.  That advantage is eroding quickly away right now.  I think in 2016, they'll have only a 15% cost advantage vs a 100% cost advantage now.  I would suggest to you that GM is second only to Tesla in EV technology.

 

People think of the Volt as a sales dud, while they sing the praises of Tesla.  Volt outsells Tesla.  It looks to me like GM cars (Volt, Sonic, and whatever Cadillac appears) will always outsell Tesla.  That's not to slam Tesla: Tesla is a high-margin, low volume company; GM is a high-volume, low-margin company. 

 

 

US will have 17 million car sales.

 

Tesla will not even have 50,000 car sales in 2014. While electric cars will gain market share, it is not a threat at this time to the industry. Eg. a recent goal set was to have 30% of all cars be electric by 2030.

 

It might start to happen sooner than that, look at Tesla walking circle around it's competitors. EV and Self Driving Cars are disruptives technology today's leader has nothing to do with tomorrow.

 

BeerBaron

[xazp]

I think Europe will be profitable in 2016.  If you look at their current earnings, you'll see they are almost break-even when you back-out restructuring costs.  They are losing about $100-$200MM/quarter (ex-restructuring).  My view is that excluding Chevy (they're removing the brand from Europe) which is their worst brand there, and including various plant closures (not yet complete) they are already modestly profitable in Europe. 

 

However: I'd like to see someone defend the view that GM will have 10% N.A. margins.  I've read many analyst reports and they are openly skeptical.  To my knowledge, even the most bullish analysts don't model 10% N.A. margins in 2016.  Which means, more upside if GM can achieve their goals.  But while I've figured out how they'll make their European targets, I'm not sure about their U.S. targets.  I have some ideas but would like to provoke a discussion about it. 

 

 

 

The $6.5 billion of FCF that someone mentioned above is too low if you figure NA gets to a 10% pre-tax margin by the time we hit 2016 -- as Mary Barra has indicated she's targeting.

 

If NA margins hit 10% and Europe is no longer negative by 2016, keeping everything else the same, you'll get to almost $5 per share of earnings and/or FCF by 2016.

[Mephistopheles]

Is there a good primer to understand the auto loan market/ABS, specifically for sub prime?