GM - General Motors

[vinod1]

Buffett mentioned this morning that credit standards are starting to loosen in subprime auto. Wells Fargo has recently put a cap on the subprime % of total auto loans it is willing to underwrite - at 10%.

 

http://www.nytimes.com/2015/03/02/business/dealbook/wells-fargo-puts-a-ceiling-on-subprime-auto-loans.html?ref=dealbook&_r=0

 

Although GM Financial is expanding into prime auto lending, a vast majority of its loans are made to subprime borrowers. I've been tracking its U.S. ABS trusts every month, and the number of delinquencies have been creeping up, for both 30-60 and 60+ days, although not quite as high as levels pre crash.

 

I haven't gone through GM Financial's '14 10-k yet, but I've been a bit concerned about this for some time. What does everyone think of this?

 

It is concerning but GM financial isn't a large part of it's revenues. $4B compared to $150B of auto sales

 

Yes but there are $25 billion of auto loans on the book, and $8 billion of dealership loans.

 

Assume pretty draconian loss numbers of something like 20% default rate and 50% loss severity. Even then it is not going to make or break GM investment thesis. To me this would not be one of the main risks to be worried about with GM.

 

Vinod

[Mephistopheles]

Buffett mentioned this morning that credit standards are starting to loosen in subprime auto. Wells Fargo has recently put a cap on the subprime % of total auto loans it is willing to underwrite - at 10%.

 

http://www.nytimes.com/2015/03/02/business/dealbook/wells-fargo-puts-a-ceiling-on-subprime-auto-loans.html?ref=dealbook&_r=0

 

Although GM Financial is expanding into prime auto lending, a vast majority of its loans are made to subprime borrowers. I've been tracking its U.S. ABS trusts every month, and the number of delinquencies have been creeping up, for both 30-60 and 60+ days, although not quite as high as levels pre crash.

 

I haven't gone through GM Financial's '14 10-k yet, but I've been a bit concerned about this for some time. What does everyone think of this?

 

It is concerning but GM financial isn't a large part of it's revenues. $4B compared to $150B of auto sales

 

Yes but there are $25 billion of auto loans on the book, and $8 billion of dealership loans.

 

Assume pretty draconian loss numbers of something like 20% default rate and 50% loss severity. Even then it is not going to make or break GM investment thesis. To me this would not be one of the main risks to be worried about with GM.

 

Vinod

 

Thanks Vinod, that put it into perspective for me.

 

And it's even less than that because much of those number is in fully consolidated securities in which GM doesn't have 100% ownership.

[compounding]

GM Announces Disciplined Capital Allocation Framework

 

- Reinvesting in the business to drive 20 Percent or higher ROIC

- Targets cash balance of $20 billion, while maintaining investment-grade balance sheet

- Plans to return all available free cash flow to shareholders

- Authorizes initial $5 billion share repurchase program beginning immediately; reaffirms strong and growing dividend policy

 

[...]

 

GM’s capital allocation framework encompasses three core principles:

 

High-Return Investment in the Business – GM previously stated it expects capital expenditures in 2015 of $9 billion to invest in future growth, including a more aggressive vehicle launch cadence in the coming years. GM will reinvest in its business with the objective of driving 20 percent or higher return on invested capital (ROIC) through investments in world-class vehicles and leading technology. The company plans to disclose its ROIC performance each quarter beginning with its first quarter 2015 report.  The company expects this disciplined capital deployment will strengthen and grow GM’s brands and drive improved financial performance and will result in capital spending in the range of 5–5.5 percent of its annual revenue in the future.

 

Maintain an Investment-Grade Balance Sheet – GM intends to maintain an investment-grade balance sheet, including a target cash balance of $20 billion. GM believes maintaining an investment-grade balance sheet is critical to support long-term growth and increased earnings at GM Financial, which is a catalyst for improved automotive sales and profitability.

 

Return Capital to Shareholders – Beyond reinvesting in the business and maintaining an investment grade balance sheet, the company expects to return all available free cash flow to shareholders. Starting in January 2016, GM will develop its annual capital return plans and communicate them to the market during the first quarter of each year.

In 2014, the company established an executive compensation program that aligns management incentives with ROIC and total shareholder return. GM said it is committed to providing greater clarity around its compensation program and will continue to evaluate the program to ensure that strong linkage.

 

http://www.gm.com/company/investors/latest-news/news_detail_page.content_pages_news_us_en_2015_mar_0309-allocation-framework.~content~gmcom~home~company~investors.html

[merkhet]

WSJ is reporting that Wilson is dropping his bid for a board seat.

[compounding]

WSJ is reporting that Wilson is dropping his bid for a board seat.

 

So is GM  :)

 

Here you go: http://www.gm.com/company/investors/latest-news/news_detail_page.content_pages_news_us_en_2015_mar_0309-investment-group.~content~gmcom~home~company~investors.html

[merkhet]

Was that in the press release? If so, I missed it.

 

EDIT: Ah, thanks. It was in the next press release down. :)

[compounding]

Was that in the press release? If so, I missed it.

 

EDIT: Ah, thanks. It was in the next press release down. :)

 

No problem.

 

The slides from today's presentation may also be worth your time for you guys that are interested in either GM or the auto industry at large. They were attached in the first press release as "Chart-set".

[vinod1]

Was that in the press release? If so, I missed it.

 

EDIT: Ah, thanks. It was in the next press release down. :)

 

No problem.

 

The slides from today's presentation may also be worth your time for you guys that are interested in either GM or the auto industry at large. They were attached in the first press release as "Chart-set".

 

Thanks for pointing out the presentation.

 

I am impressed with this pretty significant change in management attitude towards capital allocation and management compensation. I did not expect this when I invested in GM.

 

Vinod

 

 

[cubsfan]

Maybe all those conversations between Buffett and Mary Barra paid off!

[racemize]

Actually, in recent interviews, Buffett didn't seem too keen on buybacks at GM.  Or at least, he said there were reasons why they would want the cash around instead of doing a buyback.

[PJM]

Was that in the press release? If so, I missed it.

 

EDIT: Ah, thanks. It was in the next press release down. :)

 

No problem.

 

The slides from today's presentation may also be worth your time for you guys that are interested in either GM or the auto industry at large. They were attached in the first press release as "Chart-set".

 

Thanks for pointing out the presentation.

 

I am impressed with this pretty significant change in management attitude towards capital allocation and management compensation. I did not expect this when I invested in GM.

 

Vinod

 

Folks - Maybe a very silly question but can anyone explain what are "Average automative net income assets" and why is it deducted for calculating ROIC average net assets?

 

Thanks in advance.

 

[fareastwarriors]

Ford, Mercedes-Benz Set Up Shop in Silicon Valley

 

New nexus of car industry emerges as Apple, Uber and Google push automotive ambitions

 

http://www.wsj.com/articles/ford-mercedes-set-up-shop-in-silicon-valley-1427475558?mod=WSJ_article_EditorsPicks_0

[CorpRaider]

I should really sell out of these warrants, take my gains and thank my lucky stars.  I just hate this business.  Not only do you have non-rational, quasi state-sponsored entities, complete with manipulated currencies, dumping product, to go along with unions, organized labor and politicians trying to feed their little piggy bellies at the trough; massive capital intensity....you've got, TSLA, and now GOOG and AAPL, coming in to try and take over the industry, not to mention all the zip cars and ubers and sharing services trying to free the millenials from the yoke of automobile ownership.  I need a drink.  :o  hehe. 

[compounding]

I should really sell out of these warrants, take my gains and thank my lucky stars.  I just hate this business.  Not only do you have non-rational, quasi state-sponsored entities, complete with manipulated currencies, dumping product, to go along with unions, organized labor and politicians trying to feed their little piggy bellies at the trough; massive capital intensity....you've got, TSLA, and now GOOG and AAPL, coming in to try and take over the industry, not to mention all the zip cars and ubers and sharing services trying to free the millenials from the yoke of automobile ownership.  I need a drink.  :o  hehe.

 

But it's only a few times EBITDA!  ;)

 

To ease your mind a bit (you might need that drink anyway), you may enjoy reading up on "the chicken tax" and profit margins for pickup trucks. Also, GOOG doesn't seem interested at all in manufacturing, and I wouldn't be surprised if the same goes for AAPL. As for the unions/organised labour, the good thing about being a global carmaker in a world with diminishing barriers for trade is that wages can be arbitraged.

[racemize]

Damodaran on the GM buyback (and not too pretty comments on GM or autos).

 

http://aswathdamodaran.blogspot.com/2015/03/the-gm-buyback-beyond-hysteria.html

[fareastwarriors]

G.M. Bets Big on a Resurgent Cadillac

 

http://www.nytimes.com/2015/04/03/business/gm-bets-big-on-cadillac-ct6.html?hp&action=click&pgtype=Homepage&module=photo-spot-region&region=top-news&WT.nav=top-news&_r=0

[nikhil25]

How a former Audi guy plans to spend $12B reviving Caddy

http://bloom.bg/1GHQO9y

[CorpRaider]

Damodaran on the GM buyback (and not too pretty comments on GM or autos).

 

http://aswathdamodaran.blogspot.com/2015/03/the-gm-buyback-beyond-hysteria.html

 

Thanks for sharing that.

[merkhet]

A federal judge ruled Wednesday General Motors Co. can keep its bankruptcy shield, which allows it to block potentially billions of dollars in legal claims by hundreds of customers seeking damages over a defective ignition switch.

 

http://www.wsj.com/articles/judge-rules-gm-can-keep-its-bankruptcy-shield-1429133128

[fareastwarriors]

From Greenlight/Einhorn:

 

We decided to take another drive in General Motors (GM) and repurchased a fresh stake at

$34.62 per share. We had held GM for about three years before selling it in early 2014,

when we were disappointed with management’s earnings guidance. 2015 should be a better

year for GM: the company is a year closer to eliminating its losses in Europe; low gas

prices should stimulate demand for its highly profitable SUV and light truck product lines;

raw material costs are low; and we believe that the worst of the product recalls is behind

them. Finally, GM has acknowledged it might not need quite so much cash lying around

earning zero interest, and it will begin to buy back shares shortly. While GM also trades at

less than 8x 2015 consensus estimates of $4.63 per share, we believe there is an excellent

chance that GM can beat those expectations. GM shares closed the quarter at $37.50.

 

http://www.valuewalk.com/wp-content/uploads/2015/04/Qlet2015-01.unlocked-1.pdf

[rsmehta]

Thoughts on today's conference call???

 

    I'm trying to get excited, but management is so blah in their guidance.

 

    I really hope that their revamped lineup in over the next 2 years does well. Seems like the only way this can really pop.

[merkhet]

They bought back well over $750 million in shares since March 9. I don't know when the blackout period started, but that's a pretty strong buyback. They also indicated that they might go over the $5 billion initial allotment for buybacks depending on their ability to fund their projects and keep a $20 billion cushion.

[rico1181]

Management has recently started reporting the ROIC metric, which is calculated incorrectly in my view. I am not sure if one should include the deferred tax asset in the ROIC calculation. A more useful metric would be return on net tangible assets or return on capital employed. Any thoughts?

[tylerdurden]

They had to keep some cars longer because of the recall repairs so when they send them to the auctions the pricing was lower and created a negative $400 million impact. One analyst estimated this as 17 cents impact and w/o this factor which should be less in Q2 and hopefully disappear in 2H, Q1 US margin was 10.4%. To me, as long as gas prices stay low tailwinds are really strong. We'll also begin to see the impact of repurchases on weighted average share count in coming quarters so I don't think  there is any reason to be negative. Perhaps it is better the Q1 came in below estimates so they can buy more shares with lower price...

[merkhet]

I'm loving the weakness in the share price. We just need it to stay low through the blackout window so that management can keep buying back shares at these prices.