GM - General Motors

[TwoCitiesCapital]

I can't help but start to get bullish on GM when i see silly headlines & logic like this!:

 

"General Motors: Cheap Valuation, Sizable Dividend ‘Largely Irrelevant’"

 

http://blogs.barrons.com/stockstowatchtoday/2015/07/16/general-motors-cheap-valuation-sizable-dividend-largely-irrelevant/?mod=yahoobarrons&ru=yahoo

 

I tend to agree. The pessimism seems to be building with China headlines. I came across an article trying to pin the selloff:

 

"The weakness, attributable to general market malaise, fears over slower growth in China and uncertainty over the sustainability of near-record U.S. auto sales"

 

I scanned the Barclay's downgrade today and found the analysis somewhat laughable. Maintaining above consensus EPS but downgrading shares? It actually reinforced the fact that returning foreign ops (ex-China) to breakeven will be far more impactful than a decline in China JV income.

 

Would you guys say the car industry as a whole is undervalued?

 

I mean, I already own shares in Fiat and in HYUD (and Kia via HYUD). GM certainly looks cheap, but I'm hesitant to add another auto manufacturer in a known-cyclical industry several years into a sales upswing...it seems like many of the operators in the industry are "cheap" so what is making it that way? Is it simply a bunch of idiosyncratic factors holding down the valuations of each individual company or are we over-estimating the value to be found in some, or all, of them?

[valuedontlie]

I can't help but start to get bullish on GM when i see silly headlines & logic like this!:

 

"General Motors: Cheap Valuation, Sizable Dividend ‘Largely Irrelevant’"

 

http://blogs.barrons.com/stockstowatchtoday/2015/07/16/general-motors-cheap-valuation-sizable-dividend-largely-irrelevant/?mod=yahoobarrons&ru=yahoo

 

I tend to agree. The pessimism seems to be building with China headlines. I came across an article trying to pin the selloff:

 

"The weakness, attributable to general market malaise, fears over slower growth in China and uncertainty over the sustainability of near-record U.S. auto sales"

 

I scanned the Barclay's downgrade today and found the analysis somewhat laughable. Maintaining above consensus EPS but downgrading shares? It actually reinforced the fact that returning foreign ops (ex-China) to breakeven will be far more impactful than a decline in China JV income.

 

Would you guys say the car industry as a whole is undervalued?

 

I mean, I already own shares in Fiat and in HYUD (and Kia via HYUD). GM certainly looks cheap, but I'm hesitant to add another auto manufacturer in a known-cyclical industry several years into a sales upswing...it seems like many of the operators in the industry are "cheap" so what is making it that way? Is it simply a bunch of idiosyncratic factors holding down the valuations of each individual company or are we over-estimating the value to be found in some, or all, of them?

 

The best values (GM and Fiat in my opinion) seem to have some execution aspect to their story. There are more than a handful of global auto players that don't seem as "cheap" such as Toyota, Honda, Nissan, Suzuki, Mitsubishi, etc.

[gokou3]

OK, so I am not the only one who thinks GM is cheap at $30.xx.  If my memory serves, GM got $2B of dividends from its China JV last year.  A meaningful sum but even if it gets halved due to sales weakness, the reduced overall earning yield is still very high. 

 

Not to mention European sales are picking up.  I think we can see European sales trends following the US (i.e. large negative shock in car sales during financial crisis, cars got old and trends reverse)

http://seekingalpha.com/news/2632235-opel-june-european-car-registrations-plus-7_6-percent

 

Tipped into GM-WTB today.  :)

 

 

[tylerdurden]

I agree with the general sentiment here. Barclays quote from the analyst was a shocker to me as well. If the valuation is not the driver of your recommendation, what is it then? Unbelievable to me, seeing him to admit that openly... Anyways, china obviously scared the ...t out of some analysts including GS and Barclays and some investors of course. China seems slowing that's correct but I would not project just one month data to a much longer period of time. Even when the stock market was booming this year, the auto sales was challenged there so I don't think that's even related to the stock market meltdown. It's  normal to see fluctuations in any industry/region to me. China should still continue to grow solidly in my view with all those people that need cars to get cheap/safe transporation on a daily basis. On top of that, don't think oil/gas prices are going up anytime soon which is a global tailwind for autos. EU seems recovering. Raw materials going down. GM is supposed to get more efficient with less number of platforms that will be used for manufacturing. As you can tell, I still believe, GM can handle a china slowdown fine. To Merkhet's point, I hope they will even get more aggressive w/ buybacks, as long as they keep enough liquidity for ops and coming legal fines for the recall. If that happens these analyst might regret that they downgraded GM on "irrelevant factors such as valuation" :-)

[RadMan24]

Raw materials are very cheap, thanks to China. But GM is trying to reinvest and take back its previous prowess it once had. The company has a great CEO to get the job done, and there are risks in the auto industry, but that's why they have such a huge cash pile. China domestic auto makers have been doing a lot better this year, as prices decline and take back share from foreign makers. But long-term, China will be a very profitable business for GM.

 

If Europe bounces back, that removes $1-$2 billion a year in losses out of the income statement, and the U.S. auto industry has been at so called "near record levels" for some time, but its not like everyone in rich or middle class neighborhoods own a brand spanking new car, the economy is bouncing back and people are replacing their junk beaters. If people didn't maintain or keep up with their vehicles during the last recession..of course those vehicles are going to get expensive with repairs and buying a new or used car is just way more economical and affordable. Analysts can worry all they like about when the next down turn happens, I just think they all believe it will be like 08 and 09 again, they seem to have labeled the "trough" of the industry with "bankruptcy" Sure that can happen, but GM is way more financially sound compared to then and should be able to whether a storm like that.

[smd123]

The valuation puzzles me. GM took a charge of $2.5B for recalls last year. Its equity income from China in total was $2B.

 

If one assumes normalized rate of recalls, GM automotive earns the following (approximately):

 

Revenues: $150B

Operating Income: $8-9B

Net Income: $6B

Depreciation and CapEx are each ~ $7B

Owner's Earnings ~ $6B, or $3.85 per share

 

MV: $50B

Automotive Cash: $20B

Automotive Debt: $9B (not considering GM financial here)

 

Ex of cash, the automotive business is selling at 6 times the cash flow. This is not assigning any value to GM financial yet.

 

What am I missing?

[Jurgis]

What am I missing?

 

I'm not interested in GM at all, so take the following with grain of salt:

 

GM is a highly cyclical company with pretty much no moat and heavy competition on a 6th year of economic expansion.

You might be paying the low multiple on cycle-top results.

 

But then others argue that it is indeed very cheap. :)

 

Good luck

[vinod1]

What am I missing?

 

I'm not interested in GM at all, so take the following with grain of salt:

 

GM is a highly cyclical company with pretty much no moat and heavy competition on a 6th year of economic expansion.

You might be paying the low multiple on cycle-top results.

 

But then others argue that it is indeed very cheap. :)

 

Good luck

 

+1

 

They need the $20 billion in cash as much as they need steel to make cars. So you should not be deducting them in your calculation of EV. So not dead cheap, but it is modestly cheap.

 

I have a small amount in calls.

 

Vinod

[RadMan24]

The valuation puzzles me. GM took a charge of $2.5B for recalls last year. Its equity income from China in total was $2B.

 

If one assumes normalized rate of recalls, GM automotive earns the following (approximately):

 

Revenues: $150B

Operating Income: $8-9B

Net Income: $6B

Depreciation and CapEx are each ~ $7B

Owner's Earnings ~ $6B, or $3.85 per share

 

MV: $50B

Automotive Cash: $20B

Automotive Debt: $9B (not considering GM financial here)

 

Ex of cash, the automotive business is selling at 6 times the cash flow. This is not assigning any value to GM financial yet.

 

What am I missing?

 

GM financial could become very profitable, which would add additional downside protection to the "cyclical" aspect of this industry. Your estimates include Europe losses I'm assuming, but those likely won't continue, but still...nothing wrong with more cautionary projections. It's a matter of taste, Munger firmly believes GM is doomed to fail (all three less they merge and increases their odds of survival). Others think its got some life before then, like Welsch. 

[tylerdurden]

Cyclical ok but which market, region, country? These are global companies. I don't think anyone can argue that we are in the same cycle in every continent/country at the same time. There is some diversification benefit to these auto companies in terms of their global exposures. I don't think S America or EU is at the same cycle with US for example. China might be still feeding the industry for a very long time to come with millions of people needing safe/reliable cars every year. If you believe China will meltdown drastically there are zillions of other companies/industries who are doomed as well I think. Anyways, my view is that writing off the autos by saying they operate in a highly cyclical, low rate of return industry is too simplistic point of view. I seriously think after going through these bankruptcies the auto cos have better understanding of what works and what not in the long term and that would also show in their long term results as well. If you don't think this way, it is better for you to skip this name of course...

[smd123]

The valuation puzzles me. GM took a charge of $2.5B for recalls last year. Its equity income from China in total was $2B.

 

If one assumes normalized rate of recalls, GM automotive earns the following (approximately):

 

Revenues: $150B

Operating Income: $8-9B

Net Income: $6B

Depreciation and CapEx are each ~ $7B

Owner's Earnings ~ $6B, or $3.85 per share

 

MV: $50B

Automotive Cash: $20B

Automotive Debt: $9B (not considering GM financial here)

 

Ex of cash, the automotive business is selling at 6 times the cash flow. This is not assigning any value to GM financial yet.

 

What am I missing?

 

GM financial could become very profitable, which would add additional downside protection to the "cyclical" aspect of this industry. Your estimates include Europe losses I'm assuming, but those likely won't continue, but still...nothing wrong with more cautionary projections.

 

Yes, in the above scenario*

- $1.2b loss assumed for Europe

- reduced equity income from China ($1.5b instead of $2b)

- not considering any value assigned to GM financial

- not including any benefit due to $34b of deferred tax assets to GM

 

The question is whether the above provides a sufficient margin of safety.

 

 

* one could also add $10-12b of pensions to debt, even though GM has no funding requirements for the next few years. Despite that, the above question stands.

[Mephistopheles]

 

- not including any benefit due to $34b of deferred tax assets to GM

 

 

The DTA is one of the reasons I own this as well. It's currently more than $20/share of value. Let's give the above mentioned $3.85 a measly 8x multiple, that gets you the current stock price. If you only add the DTA, it's a 67% return. Of course, it doesn't include the time needed to get there, but nevertheless it looks like an incredible value to me.

[LowIQinvestor]

Can someone point me towards the DTA value in an SEC filing? I'm digging around for it...

 

Tomorrow should be interesting for GM. I just bought some.

[RadMan24]

Page 118 of annual report or note 18 section Deferred Income Tax Assets and Liabilities. just Cont F on Sec's website in the 2014 10-K will bring up the section. You will see a list of deferred tax assets, totalling $34 Billion. $14B of which are NOLs.

[LowIQinvestor]

Thanks Radman,

 

I'm about to listen to the Autonation conference call but I think auto demand is still growing:

 

"In the second quarter of 2015, AutoNation's retail new vehicle unit sales increased 6% overall and 4% on a same store basis, while retail used vehicle unit sales increased 9% overall and 7% on a same store basis."

 

-----Domestic revenue grew 9.9% (The Domestic segment is comprised of stores that sell vehicles manufactured by General Motors, Ford, and FCA US (formerly Chrysler))

[LowIQinvestor]

http://media.gm.com/content/dam/Media/gmcom/investor/2015/jul/GM-2015-Q2-Press-Release.pdf

 

GM is still cheap!

[racemize]

Year-to-date through July 21, GM has returned more than $3.1 billion of cash to

shareholders through share repurchases of $2.1 billion and dividends of $1.1 billion.

[merkhet]

Year-to-date through July 21, GM has returned more than $3.1 billion of cash to

shareholders through share repurchases of $2.1 billion and dividends of $1.1 billion.

 

I'm actually moderately disappointed that they haven't been more aggressive with the buyback. Other than that, though, things look good.

[CorpRaider]

Yeah they need to "lay the wood" to the buyback once they exit the earnings period, if the price doesn't jump on this report.

[tylerdurden]

Year-to-date through July 21, GM has returned more than $3.1 billion of cash to

shareholders through share repurchases of $2.1 billion and dividends of $1.1 billion.

 

I'm actually moderately disappointed that they haven't been more aggressive with the buyback. Other than that, though, things look good.

 

It does not frustrate me at all actually. $5B authorization is until end of 2016 so since March 9 buying back 2.1 out of 5 is aggressive enough to me considering that they will pay huge fine for the recalls and negotiating with the UAW for the labor contract at the moment. If everything goes well they might be done with $5B early 2016 and announce additional share repo program. They also said they used a 10b5-1 plan which enabled them to buyback shares during the blackout period until July 28th. I can't personally ask more from them considering all the complexities and unpredictabilities of running a global business like GM. Cash target is $20B according to the new shareholder return framework and Cash was $22.8B as of June 30. That's close enough with some extra cushion for unknowns. They have good balance between being aggressive and responsible.

[RadMan24]

Year-to-date through July 21, GM has returned more than $3.1 billion of cash to

shareholders through share repurchases of $2.1 billion and dividends of $1.1 billion.

 

I'm actually moderately disappointed that they haven't been more aggressive with the buyback. Other than that, though, things look good.

 

It does not frustrate me at all actually. $5B authorization is until end of 2016 so since March 9 buying back 2.1 out of 5 is aggressive enough to me considering that they will pay huge fine for the recalls and negotiating with the UAW for the labor contract at the moment. If everything goes well they might be done with $5B early 2016 and announce additional share repo program. They also said they used a 10b5-1 plan which enabled them to buyback shares during the blackout period until July 28th. I can't personally ask more from them considering all the complexities and unpredictabilities of running a global business like GM. Cash target is $20B according to the new shareholder return framework and Cash was $22.8B as of June 30. That's close enough with some extra cushion for unknowns. They have good balance between being aggressive and responsible.

 

Pretty much spot on with that. Even the 4-5% "pop", the company is still at a compelling valuation, so buybacks should be accretive.

[LowIQinvestor]

Thought for sure the stock would be up much more than 4%. I just bought more today.

 

IF GM were valued in line with Ford, it would be between a $36-$40 stock  Longer term I don't see why GM couldn't trade around 11 times 2016 earnings estimates. $55 a share.

 

 

[gokou3]

Excellent results and guidance.  Very excited to see they achieved EBIT break-even in Europe - EU sales should only improve from here just like US has had in the past few years due to pent-up demand and refreshed line-up.  I would still be watching China closely though.

 

Just doubled my small position in GM-WTB today.  Got to a half position now, will add again if prices fall back again.

 

 

[CorpRaider]

Agreed, seems real cheap to $40ish. If they start making money in Europe and dollar eases off, woah nelly.

[bigspydee]

Question, GM bought back 57.6 million shares with 2.1 billion. It should have reduced their outstanding share count from 1.61 billion to 1.55 billion. This would have made their eps to be .70 instead of 0.67 am I missing anything here? Are they counting it as treasury stock ?