GM - General Motors

[Avyalake]

Hayman capital doubled down with GM calls?

https://www.sec.gov/Archives/edgar/data/1420192/000095012314011874/xslForm13F_X01/form13fInfoTable.xml

[johnpane]

I wonder if this is an error in reporting or interpretation? 32,000 calls = options on 3,200,000 shares.

 

"During the period ended  September 30 , Bass increased his holdings in  General Motors  by more than 50 percent to 8.46 million shares, including 3.2 million calls options, from about 5.6 million shares, including 32,000 call options as of  June 30." (Source: Benzinga.com)

[tylerdurden]

I don't think so. When you compare his latest 13F with previous period, you'll see the huge increase in calls. David Tepper also increased its investment alongside Berkshire. I did not see any new investments in GM among the value investors but at least the believers showed some conviction. I'll take that...

[xazp]

Today's price is below the lowest in Q3, so you can under price Berkshire, Tepper, etc. 

 

I don't think so. When you compare his latest 13F with previous period, you'll see the huge increase in calls. David Tepper also increased its investment alongside Berkshire. I did not see any new investments in GM among the value investors but at least the believers showed some conviction. I'll take that...

[tylerdurden]

Today's price is below the lowest in Q3, so you can under price Berkshire, Tepper, etc. 

 

I don't think so. When you compare his latest 13F with previous period, you'll see the huge increase in calls. David Tepper also increased its investment alongside Berkshire. I did not see any new investments in GM among the value investors but at least the believers showed some conviction. I'll take that...

 

I am already invested in GM and waiting for brighter days  :) but for interested folks it might be good price to enter at the moment

[fareastwarriors]

GM Rising Sales Vie With Recall Woes as Stock Stays Cheap

 

http://www.bloomberg.com/news/2014-11-19/gm-rising-sales-vie-with-recall-woes-as-stock-stays-cheap.html

[rishig]

Redefing the Cadillac brand:

http://seekingalpha.com/article/2700405?source=ansh $GM

[leadingusforward]

Eric -

 

Thanks for taking so much time to explain your GM investment rationale.  Why not use shorting to protect your downside vs. puts?

[Arden]

Meiroy, your link leads to this very page.

[ERICOPOLY]

Eric -

 

Thanks for taking so much time to explain your GM investment rationale.  Why not use shorting to protect your downside vs. puts?

 

 

Use GM to protect the downside from shorting?

Use shorting to protect the downside of GM?

 

Depends on point of view.

 

I like puts on the name I hold because it's guaranteed to work and the cost of the hedge is well understood.  Plus, shorting uses up my margin whereas puts increase it.

[Gopinath]

I believe the dividend payments are adjusted towards(downwards) the exercise price of the warrants just like in the bank warrants? Can anyone confirm?

[rpadebet]

I believe the dividend payments are adjusted towards(downwards) the exercise price of the warrants just like in the bank warrants? Can anyone confirm?

 

Not sure if GM warrants have same dividend protection. Warrant holders might be left holding the bag if business does well and capital allocation goes to regular dividend payments. I may be wrong or maybe thinking of something else.

[racemize]

I believe the dividend payments are adjusted towards(downwards) the exercise price of the warrants just like in the bank warrants? Can anyone confirm?

 

No regular dividend protection on GM warrants.

[rishig]

I believe the dividend payments are adjusted towards(downwards) the exercise price of the warrants just like in the bank warrants? Can anyone confirm?

 

No regular dividend protection on GM warrants.

 

May be I am reading this incorrectly, but the 8-A shows that there is dividend adjustment

http://www.sec.gov/Archives/edgar/data/1467858/000119312511103292/d8a12b.htm

 

If we make a dividend or other distribution to all holders of our common stock of shares of (i) our capital stock (other than our common stock), (ii) evidences of our indebtedness, (iii) rights or warrants to purchase our securities or assets, or (iv) property or cash (excluding ordinary cash dividends and excluding any dividend, distribution or issuance covered by the two bullets above), then the exercise price will be adjusted based on the following formula:

 

EP1 = EP0 x ((SP0 – FMV) / SP0)

 

where:

 

EP0 = the exercise price in effect at the close of business on the record date;

EP1 = the exercise price in effect immediately after the record date;

SP0 = the Current Market Price (as defined above) as of the record date; and

FMV = the fair market value (as determined in good faith by our Board of Directors), on the record date for such dividend or distribution, expressed as an amount per share of outstanding common stock.

[ERICOPOLY]

I believe the dividend payments are adjusted towards(downwards) the exercise price of the warrants just like in the bank warrants? Can anyone confirm?

 

No regular dividend protection on GM warrants.

 

May be I am reading this incorrectly, but the 8-A shows that there is dividend adjustment

http://www.sec.gov/Archives/edgar/data/1467858/000119312511103292/d8a12b.htm

 

If we make a dividend or other distribution to all holders of our common stock of shares of (i) our capital stock (other than our common stock), (ii) evidences of our indebtedness, (iii) rights or warrants to purchase our securities or assets, or (iv) property or cash (excluding ordinary cash dividends and excluding any dividend, distribution or issuance covered by the two bullets above), then the exercise price will be adjusted based on the following formula:

 

EP1 = EP0 x ((SP0 – FMV) / SP0)

 

where:

 

EP0 = the exercise price in effect at the close of business on the record date;

EP1 = the exercise price in effect immediately after the record date;

SP0 = the Current Market Price (as defined above) as of the record date; and

FMV = the fair market value (as determined in good faith by our Board of Directors), on the record date for such dividend or distribution, expressed as an amount per share of outstanding common stock.

 

Specifically excluding "ordinary cash dividends".

[rsmehta]

GM USA YTD sales(thru November): 2.660M, 4% increase from 2013 on volume, ATP have been going up too.

 

GM china YTD sales(thru November): 3.182 MM, 10.1% increase from 2013

--------------------------------------

 

    A relatively clean year in USA/China for 2015 will yield an EPS of $5+.

 

    Shutting down Chevy in Europe and increasing sales from Opel/Vauxhall will hopefully have GM Europe be break-even(or close to it) for the 2015.

 

---------------------------------------

 

    It's amazing how the GM sales just keep growing YoY even with all this negative press! It's hard not to get excited about 2015 prospects, especially being a warrant holder.

 

[merkhet]

My back-of-the-envelope calculation has GNMA doing about $11 billion pre-tax in 2015.

 

If GME gets break even and GMIO/GMSA + GM Financial/Corporate net one another out, then you're looking at more than $5 per share of EPS and roughy $7 per share of owners earnings -- put a 12.2x multiple (industry average P/E) on either of those numbers and GM is a home-run.

 

And that multiple is probably a bit low -- we have close to 10 million units of pent-up auto demand, which indicates that we are nowhere near the end of the replacement supercycle.

[compounding]

My back-of-the-envelope calculation has GNMA doing about $11 billion pre-tax in 2015.

 

If GME gets break even and GMIO/GMSA + GM Financial/Corporate net one another out, then you're looking at more than $5 per share of EPS and roughy $7 per share of owners earnings -- put a 12.2x multiple (industry average P/E) on either of those numbers and GM is a home-run.

 

And that multiple is probably a bit low -- we have close to 10 million units of pent-up auto demand, which indicates that we are nowhere near the end of the replacement supercycle.

 

GM Financial made $0.5 billion in H1 and have very low penetration compared to what is normal for a captive financing arm: http://www.autonews.com/article/20141201/FINANCE_AND_INSURANCE/312019959/gm-financial-ceo-sees-big-growth-ahead?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+autonews%2FFinanceAndInsurance+%28Automotive+News+Finance+and+Insurance+Feed%29

 

GM China seems to be chugging along, albeit growing at a slower pace. Maybe I misunderstood, but to me it seems very conservative to assume that GM excluding GMNA will break even?

 

Also, if you will, what are your assumptions for $11 billion pretax from GMNA?

 

Btw, if your assumptions about eps, owner earnings and multiple are anywhere close to correct, the C-warrants will be a 10-bagger.

[merkhet]

My back-of-the-envelope calculation has GNMA doing about $11 billion pre-tax in 2015.

 

If GME gets break even and GMIO/GMSA + GM Financial/Corporate net one another out, then you're looking at more than $5 per share of EPS and roughy $7 per share of owners earnings -- put a 12.2x multiple (industry average P/E) on either of those numbers and GM is a home-run.

 

And that multiple is probably a bit low -- we have close to 10 million units of pent-up auto demand, which indicates that we are nowhere near the end of the replacement supercycle.

 

GM Financial made $0.5 billion in H1 and have very low penetration compared to what is normal for a captive financing arm: http://www.autonews.com/article/20141201/FINANCE_AND_INSURANCE/312019959/gm-financial-ceo-sees-big-growth-ahead?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+autonews%2FFinanceAndInsurance+%28Automotive+News+Finance+and+Insurance+Feed%29

 

GM China seems to be chugging along, albeit growing at a slower pace. Maybe I misunderstood, but to me it seems very conservative to assume that GM excluding GMNA will break even?

 

Also, if you will, what are your assumptions for $11 billion pretax from GMNA?

 

Btw, if your assumptions about eps, owner earnings and multiple are anywhere close to correct, the C-warrants will be a 10-bagger.

 

Yes, I'm trying to be conservative on the other segments of GM.

 

I expect that GMNA will do around $103 billion in sales this year, and they'll be able to do about $110 billion in sales in 2015 w/ an operating margin of 10%.

 

I'd be wary of the C-warrants, since they expire December 2015. That's a little too much of a white-knuckle ride for me. :)

[vinod1]

My back-of-the-envelope calculation has GNMA doing about $11 billion pre-tax in 2015.

 

If GME gets break even and GMIO/GMSA + GM Financial/Corporate net one another out, then you're looking at more than $5 per share of EPS and roughy $7 per share of owners earnings -- put a 12.2x multiple (industry average P/E) on either of those numbers and GM is a home-run.

 

And that multiple is probably a bit low -- we have close to 10 million units of pent-up auto demand, which indicates that we are nowhere near the end of the replacement supercycle.

 

I hope you turn out to be right! But it is way toooo optimistic.

 

GM is the quintessential cyclical stock - even more so from a cash flow perspective. Management target of 10% EBIT for NA, I think is more of a cyclical peak. The cycle average is going to be much less. So market is unlikely to put a 12x multiple on peak cyclical earnings.

 

It is also too aggressive to put a multiple on cash earnings which are only temporarily high due to DTA's.

 

Almost all the companies are ramping up capacity in NA. That is usually a sign of approaching peak in terms of profitability. But this is just a guess.

 

Have you considered 318 million warrants in your share count?

 

Vinod

[merkhet]

I stole this from Plan Maestro's twitter account, so I can't take any credit for it. (Attached)

 

With about 12 million units that should have been sold from '09 to '13, and two years that took out around 2 million units from that reserve, we should still have about 10 million units left to go.

 

I'd be hard pressed to call this a cycle peak -- and the industry is already at a 12.2x multiple, so I don't quite get why you think the market wouldn't give GM such a multiple. (Ford is at 10.5x and Fiat is a 13.5x)

 

I'm using the diluted share count from the most recent 10-Q, which doesn't count the 46 million C warrants since they're not yet in-the-money -- moreover, while I think the cash earnings are temporarily high because of the DTAs, my guess is that the company will spend some of its free cash flow repurchasing stock, so that $5 EPS will probably approximate normalized after-tax EPS anyway.

[vinod1]

1. All I am saying is that for GM, a 10% EBIT margin is likely to be peak profitability at the top of the cycle. They are unlikely to maintain or average that level of profitability throughout the cycle.  So market is not going to put a high multiple when that peak profitability is reached. GM still has 4 brands just in NA, Ford has two worldwide. So Ford is likely to have slightly higher profitability than GM just from branding expense advantage.

 

2. I hear you regarding the replacement cycle. But, I am not sure if at least some of that is lost forever, cars lasting longer, consumer deleveraging and hence less propensity to go for the 3rd car. Anyway, GM makes money in only two segments, Trucks in NA, equity investment income from Chinese JV. So as housing recovers, I would expect GM profitability to increase as well.

 

3. The share count is a bit misleading because GAAP requires the company to use Treasury stock method to account for the dilution. When GM stock price is low, this results in very low dilution. If you assume a much higher price the dilution increases. I assumed a price of around $45 or so and diluted share count comes to about 1.85 billion.

 

Vinod

[merkhet]

I don't think you can look at (1) and (2) separately. The profitability of GM is going to be related to the amount of pent-up demand + the amount of capacity they have -- which, last I checked, was pretty low given the demand because of closed plants over the last five or six years. That, of course, is why the companies are ramping up their capacity.

 

Though I would agree that, in previous cycles, General Motors (and, in fact, most of the car manufacturers) have had a horrible track record of maintaining profitability, etc. However, I am not sure that their past record will be as relevant going forward.

 

I hear you on the Treasury stock method, though I suspect 1.85 billion is over-counting it.

[vinod1]

I agree 1 & 2 are related.

 

GM, if I remember correctly, is already at near 100% capacity so are others in NA. As they all ramp up capacity, what does it do to pricing? All of them are in a product refresh cycle. So can all of them win?

 

Many of the profitability problems have been fixed – healthcare obligations for retirees have been largely eliminated, US and Non-US pension obligations reduced to a manageable level, manufacturing facilities and dealerships rationalized, number of brands reduced in half to four, and negotiated wage reductions and labor cost flexibility with UAW. None of these however take away the fact that this is a cyclical industry with a very leveraged cash flow cycle. Take a look at the changes in Accounts Payables and Accounts Receivables over the last couple of decades and this dynamic becomes very clear. At the slightest reduction in sales, these guys can burn $5 to $10 billion cash in a hurry. Once this cycle starts, they try to stop the cash burn with increase in incentives and resulting hit to profitability.

 

I know all of the auto makers have very large cash cushions, but I do not think they can help themselves once they see a few billion dollars of cash burn. Unless you have an owner operator, it is difficult to get away from this dynamic. Look at all their presentations, the market share data figure prominently in all of them. Going forward I expect much higher profitability, but expect the cyclicality to remain and management behavior to be closer to the past.

 

I am long GM, so I am rooting for your scenario to play out.

 

Vinod

[merkhet]

I agree on the mindset being difficult to switch off -- we will see this time around whether their recent brush with death will cause the automakers to change their ways. (I think Marchionne & Elkann are a notable exception to the market share mentality you mentioned, btw.)

 

I appreciate the push back. It helps keep us all intellectually honest. :)