GM - General Motors

[AJB96]

GM has 1,583,997,449 shares outstanding as of July 16th 2015, per the 2nd quarter 10Q. In the press release, EPS figures will be given based on average shares outstanding during the period not period end shares outstanding. Lets hope they continue to repurchase as many shares as they can at these prices. At the end of the quarter GM had $22.8 billion in cash, $2.8 billion above their target cash level of $20 billion. If you go out 2-3 years the share count could end up being much lower than today.

 

Alex

[LowIQinvestor]

General Motors stock price target raised to $45 from $40 at J.P. Morgan

 

"Breakout 2Q Provides Strong Evidence GM Is On

Track to Achieve Aggressive 2016 Targets; Reiterate

Overweight & Raise PT"

[AJB96]

I wrote an update on GM for my own notes and I thought I'd share it with the board:

 

At $30 GM has a market cap of $47.5 billion. GM also has net auto cash of $13.6 billion. The US pension is currently underfunded by $10.5 billion (but they have no funding requirements going forward) and that goes to zero if interest rates rise by 96 basis points which would result in an EV of $33.9 billion. But since that hasn’t happened yet, this will be treated as debt. Resulting in an EV of $44.4 billion.

 

At this price, we are getting a business that is producing FCF of $10.8 billion a year when onetime expenses such as impairment and recall costs are excluded. That comes from taking 2015 1H net income of $2,062M adding back GAAP taxes $1,106M, one-time items of $1,657m, $600m restructuring, and $750m in additional recall expenses. For the year, capex should exceed deprecation by $1,500m.

 

The enterprise value is $44.4 billion against $10.8 billion in annual FCF.

 

There are some pretty substantial tailwinds that aren’t being included here. GM Financial is a great business and is still taking market share after GM sold the old GM Financial during the financial crisis. The largest refresh of GM vehicles in their history will almost certainly help pricing, market share and margins in the next few years. GME is continually moving towards breakeven and has made substantial progress (achieving breakeven EBIT adjusted for the first time since 1999 in Q2 2015). Management is calling for GME to hit breakeven for all 2016. GME just achieving breakeven would add $568m to annual earnings.  Furthermore, GM South America has a lot of room for improvement and a return to breakeven would add $716m to annual earnings. And finally the majority of the auto markets around the world are far below trend – Europe, Russia, South America etc. Improvement in these markets would benefit GM substantially. The international opportunities are huge with estimates of worldwide total vehicle sales of 130 million by 2030 vs. 80 million today.

 

These calculations don’t include a 1% rise in interest rates which would eliminate the pension underfunding in the US.

 

GM has a market cap of $47.5 billion at a $30 stock price. Cash and securities net of the US pension underfunding and debt is $3.1 billion, resulting in an EV of $44.4 billion. At 10x earnings the finance arm is worth over $10 billion. Thus the auto business is selling for $34.4 billion and has FCF of $9.8 billion per year or 3.5x FCF. I believe GM is worth $60-$70 per share without assuming any benefit to overseas markets improving such as Europe or South America, the pension liability decreasing, the finance arm continuing to improve, continued share buybacks, the significant volume of pent up demand in North America etc.

 

At a $60 stock price, the class B warrants are worth $42 per share vs. a current market price of $14.50.

GM_Q2_earnings.pdf

[RadMan24]

Thanks Alex, I wrote a similar argument on seekingalpha last week, I know there are several on VIC as well with similar themes. http://seekingalpha.com/article/3348755-general-motors-a-compelling-valuation-with-an-even-more-compelling-upside

 

I will say that the enterprise value is one of debate. For instance, GM plans on keeping $20 billion in cash to withstand a recession, which they assume would last 2 years. Deducting that from the EV in a highly cyclical industry gives you a slightly more "cheaper" valuation that does not give the inevitable downturn justice. Even if you lower the stock price target to around $45...B warrants still offer 90% upside in 4 years. Of course, the common stock offers a strong yield as well and the company is buying back shares.

 

In calculating the company's EV, I excluded the pension liability, largely due to the company's 14B in NOLs. Either way you value the company, it all comes down to how you view the company's new cost structure, capital allocation, and ability to remain profitable in the next 5 to 10+ years. GM Financial is doing very well and is a huge focus of the company right now. They have done a great job building that business up thus far, and management's goal of doubling financial's income by 2018 looks more and more likely (despite level earnings 14 to 15)

[fareastwarriors]

General Motors: on the Buffett table

 

http://www.ft.com/intl/cms/s/3/821cd484-3541-11e5-b05b-b01debd57852.html#axzz3h1Z1GWN5

 

 

 

General Motors might have been better off staying private. And perhaps Warren Buffett is the man to return it to its optimal state, away from the public markets that seem to have misunderstood the automaker. GM was only relisted in late 2010 after a stint in the hands of the US government, which rescued it during the financial crisis. Uncle Sam sold off the last of his stake in late 2013. Yet today even the revitalised GM trades below its IPO price of $33.

 

 

Earlier this year, a group of activist investors, frustrated by GM’s share price performance, demanded that the company become more aggressive in returning cash to shareholders. GM ultimately settled with them, agreeing to buy back $5bn in shares, increase its dividend and limit its cash balance to $20bn. But the pledges have done little for its shares. Its enterprise value to cash flow multiple is a modest 3 times.

 

In its recent second-quarter earnings, GM announced a record North American profit of nearly $3bn and a strong operating margin of 10.5 per cent. The performance was driven by high-margin truck and SUV sales. Ford second-quarter results, announced on Tuesday, echoed the strong North American market. Still, shares for both have lagged behind the US market.

 

In the wake of the activism earlier this year, Mr Buffett expressed concern about GM kowtowing to hedge funds looking for a short-term pop. Berkshire Hathaway owns about 2.5 per cent of the company.

 

An outright purchase of GM would allow Mr Buffett to achieve a series of objectives. First, with GM’s market capitalisation of $50bn he could put an immense amount of capital to work. Second, GM would fit with his preference for industrial, capital-intensive businesses such as his railroad and power utility units.

 

Those bearish on GM point to peaking profits and uncertainty in China. But a valuation discount and an investing horizon lasting decades suggest an opportunity for Mr Buffett.

 

 

 

[RadMan24]

General Motors: on the Buffett table

 

http://www.ft.com/intl/cms/s/3/821cd484-3541-11e5-b05b-b01debd57852.html#axzz3h1Z1GWN5

 

 

 

General Motors might have been better off staying private. And perhaps Warren Buffett is the man to return it to its optimal state, away from the public markets that seem to have misunderstood the automaker. GM was only relisted in late 2010 after a stint in the hands of the US government, which rescued it during the financial crisis. Uncle Sam sold off the last of his stake in late 2013. Yet today even the revitalised GM trades below its IPO price of $33.

 

 

Earlier this year, a group of activist investors, frustrated by GM’s share price performance, demanded that the company become more aggressive in returning cash to shareholders. GM ultimately settled with them, agreeing to buy back $5bn in shares, increase its dividend and limit its cash balance to $20bn. But the pledges have done little for its shares. Its enterprise value to cash flow multiple is a modest 3 times.

 

In its recent second-quarter earnings, GM announced a record North American profit of nearly $3bn and a strong operating margin of 10.5 per cent. The performance was driven by high-margin truck and SUV sales. Ford second-quarter results, announced on Tuesday, echoed the strong North American market. Still, shares for both have lagged behind the US market.

 

In the wake of the activism earlier this year, Mr Buffett expressed concern about GM kowtowing to hedge funds looking for a short-term pop. Berkshire Hathaway owns about 2.5 per cent of the company.

 

An outright purchase of GM would allow Mr Buffett to achieve a series of objectives. First, with GM’s market capitalisation of $50bn he could put an immense amount of capital to work. Second, GM would fit with his preference for industrial, capital-intensive businesses such as his railroad and power utility units.

 

Those bearish on GM point to peaking profits and uncertainty in China. But a valuation discount and an investing horizon lasting decades suggest an opportunity for Mr Buffett.

 

I'll have to read that article tomorrow in the paper, but I know that Charlie Munger as recently as 2014 said he would never buy GM.  If that somehow changes, it would be extremely interesting to say the least.

[gokou3]

General Motors: on the Buffett table

 

http://www.ft.com/intl/cms/s/3/821cd484-3541-11e5-b05b-b01debd57852.html#axzz3h1Z1GWN5

 

 

 

General Motors might have been better off staying private. And perhaps Warren Buffett is the man to return it to its optimal state, away from the public markets that seem to have misunderstood the automaker. GM was only relisted in late 2010 after a stint in the hands of the US government, which rescued it during the financial crisis. Uncle Sam sold off the last of his stake in late 2013. Yet today even the revitalised GM trades below its IPO price of $33.

 

 

Earlier this year, a group of activist investors, frustrated by GM’s share price performance, demanded that the company become more aggressive in returning cash to shareholders. GM ultimately settled with them, agreeing to buy back $5bn in shares, increase its dividend and limit its cash balance to $20bn. But the pledges have done little for its shares. Its enterprise value to cash flow multiple is a modest 3 times.

 

In its recent second-quarter earnings, GM announced a record North American profit of nearly $3bn and a strong operating margin of 10.5 per cent. The performance was driven by high-margin truck and SUV sales. Ford second-quarter results, announced on Tuesday, echoed the strong North American market. Still, shares for both have lagged behind the US market.

 

In the wake of the activism earlier this year, Mr Buffett expressed concern about GM kowtowing to hedge funds looking for a short-term pop. Berkshire Hathaway owns about 2.5 per cent of the company.

 

An outright purchase of GM would allow Mr Buffett to achieve a series of objectives. First, with GM’s market capitalisation of $50bn he could put an immense amount of capital to work. Second, GM would fit with his preference for industrial, capital-intensive businesses such as his railroad and power utility units.

 

Those bearish on GM point to peaking profits and uncertainty in China. But a valuation discount and an investing horizon lasting decades suggest an opportunity for Mr Buffett.

 

I'll have to read that article tomorrow in the paper, but I know that Charlie Munger as recently as 2014 said he would never buy GM.  If that somehow changes, it would be extremely interesting to say the least.

 

A totally speculative article with no substance.  One commentor at the end sums it best:

 

"I really don't belive Buffett would buy GM. His committment in capital intensive businesses is on highly regulated sectors (utility) or in railroads, which is a oligopolistic, slow innovation and high entry barrier sector. GM doesn't fit at all"

 

I think it has been discussed in this thread that GM is a Weschler position.  I don't doubt Weschler would increase his position though given the recent price weakness and yet good earning results.  We will know in the next 13F.

[peter1234]

"I really don't belive Buffett would buy GM. His committment in capital intensive businesses is on highly regulated sectors (utility) or in railroads, which is a oligopolistic, slow innovation and high entry barrier sector. GM doesn't fit at all"

 

+1

[cmlber]

"I really don't belive Buffett would buy GM. His committment in capital intensive businesses is on highly regulated sectors (utility) or in railroads, which is a oligopolistic, slow innovation and high entry barrier sector. GM doesn't fit at all"

 

+1

 

I agree, that comment about Buffett loving capital intensive businesses was laughable.  He likes capital intensive businesses that can deploy the capital at a high ROIC, clearly not GM.  With that said, Buffett could create a ton of value with a lot of capital buying GM and FCAU and capturing the $4.5b/yr in synergies Marchionne talked about.  At that point it would be more of a "moat" type business with that scale advantage, and they'd probably earn a respectable ROIC, especially if Sergio agreed to stay on beyond 2018 as CEO.  It's incredibly unlikely, but it's possible... and I would bet Sergio has at least suggested that possibility to Berkshire.

[Kiltacular]

"I really don't belive Buffett would buy GM. His committment in capital intensive businesses is on highly regulated sectors (utility) or in railroads, which is a oligopolistic, slow innovation and high entry barrier sector. GM doesn't fit at all"

 

+1

 

I agree, that comment about Buffett loving capital intensive businesses was laughable.  He likes capital intensive businesses that can deploy the capital at a high ROIC, clearly not GM.  With that said, Buffett could create a ton of value with a lot of capital buying GM and FCAU and capturing the $4.5b/yr in synergies Marchionne talked about.  At that point it would be more of a "moat" type business with that scale advantage, and they'd probably earn a respectable ROIC, especially if Sergio agreed to stay on beyond 2018 as CEO.  It's incredibly unlikely, but it's possible... and I would bet Sergio has at least suggested that possibility to Berkshire.

 

I don't think he'd want to be involved with the UAW. The headlines are too easy to write during contract negotiations.

[Picasso]

I think of Buffett's involvement with Salomon Brothers and how stressful it was to handle the potential hit to his reputation.  I just don't see that kind of acquisition happening with GM.

 

Maybe 3G finds a way to generate big returns in GM (probably not hard) and partners up on a limited basis with Berkshire.  But 3G focuses on quality businesses that shoot off a lot of free cash flow.  So you won't entice 3G to do the dirty work on GM either.

 

GM looks really tricky to properly value.  You have all these potential upsides such Europe, Latin America, smaller underfunded pension liabilities from rising rates, among others.  But those upsides just never materialize.

 

The part that I can't understand is the pension liability.  It's practically all offset by the cash GM holds.  Supposedly higher rates will drop that liability but I don't see how.  I mean if they're underfunded during a massive secular bull market where rates went from 15% to under 2%, how are they supposed to generate higher returns than historically if rates go from 2% to 5 or 6%?  Valuations will come down on their equity heavy portfolio so I don't know exactly how that's going to work out.

 

The people in charge of these pension funds should really be ashamed of themselves.

 

 

[hyten1]

for me i am always amazed at Toyotas valuation and profitability. GM obviously is not on par with TM (but they are getting better), but this raises the question. Is the auto biz inherently shitty or is TM the exception or both? imagine GM gets anywhere near what TM can do... obviously this is all speculation of course.

[TwoCitiesCapital]

I think of Buffett's involvement with Salomon Brothers and how stressful it was to handle the potential hit to his reputation.  I just don't see that kind of acquisition happening with GM.

 

Maybe 3G finds a way to generate big returns in GM (probably not hard) and partners up on a limited basis with Berkshire.  But 3G focuses on quality businesses that shoot off a lot of free cash flow.  So you won't entice 3G to do the dirty work on GM either.

 

GM looks really tricky to properly value.  You have all these potential upsides such Europe, Latin America, smaller underfunded pension liabilities from rising rates, among others.  But those upsides just never materialize.

 

The part that I can't understand is the pension liability.  It's practically all offset by the cash GM holds.  Supposedly higher rates will drop that liability but I don't see how.  I mean if they're underfunded during a massive secular bull market where rates went from 15% to under 2%, how are they supposed to generate higher returns than historically if rates go from 2% to 5 or 6%?  Valuations will come down on their equity heavy portfolio so I don't know exactly how that's going to work out.

 

The people in charge of these pension funds should really be ashamed of themselves.

 

The massive secular bull market in rates is likely why they're underfunded. As rates drop, they're rate of expected return going forward for all years into the future also drops. Think of it like this:

 

Bond yields start at 5%. There are two scenarios:

 

1) Bond bull market:

Yields start off at 5% in the first year and drop to 2.5% that year. Stay at 2.5% for next 49 years. FV of $1 is roughly $5.

 

2) Bond market stays flat

Yields stay at 5% for the whole 50 year horizon. FV of $1 is roughly $11.50.

 

In the first scenario you got a very quick 50% gain, which is great! The problem is that all future returns are compounding at 1/2 the return from that point on. In long-term time frames, like pension funds have, you're actually better off if bond prices are falling because it increases the value of the future returns which will compound over the next 50-100.

[merkhet]

I think of Buffett's involvement with Salomon Brothers and how stressful it was to handle the potential hit to his reputation.  I just don't see that kind of acquisition happening with GM.

 

Maybe 3G finds a way to generate big returns in GM (probably not hard) and partners up on a limited basis with Berkshire.  But 3G focuses on quality businesses that shoot off a lot of free cash flow.  So you won't entice 3G to do the dirty work on GM either.

 

GM looks really tricky to properly value.  You have all these potential upsides such Europe, Latin America, smaller underfunded pension liabilities from rising rates, among others.  But those upsides just never materialize.

 

The part that I can't understand is the pension liability.  It's practically all offset by the cash GM holds.  Supposedly higher rates will drop that liability but I don't see how.  I mean if they're underfunded during a massive secular bull market where rates went from 15% to under 2%, how are they supposed to generate higher returns than historically if rates go from 2% to 5 or 6%?  Valuations will come down on their equity heavy portfolio so I don't know exactly how that's going to work out.

 

The people in charge of these pension funds should really be ashamed of themselves.

 

The massive secular bull market in rates is likely why they're underfunded. As rates drop, they're rate of expected return going forward for all years into the future also drops. Think of it like this:

 

Bond yields start at 5%. There are two scenarios:

 

1) Bond bull market:

Yields start off at 5% in the first year and drop to 2.5% that year. Stay at 2.5% for next 49 years. FV of $1 is roughly $5.

 

2) Bond market stays flat

Yields stay at 5% for the whole 50 year horizon. FV of $1 is roughly $11.50.

 

In the first scenario you got a very quick 50% gain, which is great! The problem is that all future returns are compounding at 1/2 the return from that point on. In long-term time frames, like pension funds have, you're actually better off if bond prices are falling because it increases the value of the future returns which will compound over the next 50-100.

 

+1, got to it before I could.

 

The secular bull market helps equities go up but it creates reinvestment problems for the section of their investment allocation that has to go back into bonds.

[Picasso]

Right, but GM isn't 100% invested in bonds.  In fact they are very heavily skewed into equities with close to no bond exposure.  So we would expect them to start investing in bonds once yields go up right?  Hard to know what the values on that equity portfolio will look like if they start that transition. 

 

So the question is, the equity market has done perfectly fine and so have most bond indices for a very long time.  Why is there that much of a shortfall still after such a long bull market in every single asset class?  I don't see how a protracted asset valuation reset during a rising rate period suddenly makes their pension a ton of money.  I understand if they held the bonds to maturity a rising yield curve would be great.  But they haven't done this and I see very few that do. 

 

I think Gundlach had made the comment where Chrysler decided not to buy 12-13% Treasury bonds in the 80's because of the risk.  There is obviously some theory behind portfolio management of these pensions but the logic doesn't make sense to me. 

 

Perhaps that creates another avenue for private equity with GM.  Apollo has some of their investments take a portion of the pension and invest in their funds.  It created a bit of a competitive advantage with something like AP Alternative with their fixed annuity business.

 

[Picasso]

By the way, before I get schooled on modern pension fund management, I just want to say that I understand how the reinvestment gets hurt when rates drop.  But these guys have over 80% of their pension in stocks that directly benefited from lower rates more than any constant 7% bond reinvestment could have provided.  They should be able to lock in a lot of those equity gains into bonds and get a high cash yield on the portfolio.  So the stocks double in value and yields are down a bit, but they can now buy twice as many bonds and the net yield is still higher. 

 

But they can't even do that.  And I'm expected to believe that when or if rates go up that they can time it well this time around.  I'm a bit skeptical.

[Mephistopheles]

I have a friend who audits a pension fund of a major company. He was just explaining to me the other day the absurd complexity, diversification, number of parties involved, and layers of fees of these pension funds. It was preposterous.

 

I may be off by a bit here, but in essence: The company has a pension fund management group, that allocates the money to an external fund management company, that allocates to a private equity fund of fund manager or public equity fund of fund manager, that each respectively allocate to individual PE funds or HF/mutual funds.

 

Each of these layers have auditors, administration funds, asset management advisers and other committees.

 

Basically the industry is a great big circle jerk. Everyone makes fees for doing nothing, so everyone is happy. And nobody wants to be caught carrying the hot potato if and when there is an issue with the regulators, so allocating is the best way to prevent it.

 

I suspect these fees, in addition to the lack of temperament of most investors, group think of investment committees, and probably every other psychological phenomenon known to man are the reason for the under performance.

 

Edit: Oh and then they all hold regular meetings with 200pg slide shows giving an update of operations. These laughable slide shows consist basically of GDP, Home Prices, Unemployment, and most other useless economic indicators for the purposes of investment.

 

Social Psychology at its best.

[cmlber]

By the way, before I get schooled on modern pension fund management, I just want to say that I understand how the reinvestment gets hurt when rates drop.  But these guys have over 80% of their pension in stocks that directly benefited from lower rates more than any constant 7% bond reinvestment could have provided.  They should be able to lock in a lot of those equity gains into bonds and get a high cash yield on the portfolio.  So the stocks double in value and yields are down a bit, but they can now buy twice as many bonds and the net yield is still higher. 

 

But they can't even do that.  And I'm expected to believe that when or if rates go up that they can time it well this time around.  I'm a bit skeptical.

 

When rates go up the assumed return on assets goes up, and also the liability comes down (higher discount rate means the payments to retirees for the next 50 years are worth much less in present dollars, i.e. the liability comes down).  GM (and most companies with pensions) includes in the 10-K's a sensitivity analysis showing what would happen to the funded status with an X% move in interest rates, and I'm pretty sure Alex just used that figure to estimate what would happen to the pension with a rise in rates.

[JPerez]

Right, but GM isn't 100% invested in bonds.  In fact they are very heavily skewed into equities with close to no bond exposure.  So we would expect them to start investing in bonds once yields go up right?  Hard to know what the values on that equity portfolio will look like if they start that transition. 

 

So the question is, the equity market has done perfectly fine and so have most bond indices for a very long time.  Why is there that much of a shortfall still after such a long bull market in every single asset class?  I don't see how a protracted asset valuation reset during a rising rate period suddenly makes their pension a ton of money.  I understand if they held the bonds to maturity a rising yield curve would be great.  But they haven't done this and I see very few that do. 

 

I think Gundlach had made the comment where Chrysler decided not to buy 12-13% Treasury bonds in the 80's because of the risk.  There is obviously some theory behind portfolio management of these pensions but the logic doesn't make sense to me. 

 

Perhaps that creates another avenue for private equity with GM.  Apollo has some of their investments take a portion of the pension and invest in their funds.  It created a bit of a competitive advantage with something like AP Alternative with their fixed annuity business.

According to the 10k for the US pension the split is 16% equities, 60% debt and 24% alternative. I wouldn't call it heavily skewed into equities

[Picasso]

Right, but GM isn't 100% invested in bonds.  In fact they are very heavily skewed into equities with close to no bond exposure.  So we would expect them to start investing in bonds once yields go up right?  Hard to know what the values on that equity portfolio will look like if they start that transition. 

 

So the question is, the equity market has done perfectly fine and so have most bond indices for a very long time.  Why is there that much of a shortfall still after such a long bull market in every single asset class?  I don't see how a protracted asset valuation reset during a rising rate period suddenly makes their pension a ton of money.  I understand if they held the bonds to maturity a rising yield curve would be great.  But they haven't done this and I see very few that do. 

 

I think Gundlach had made the comment where Chrysler decided not to buy 12-13% Treasury bonds in the 80's because of the risk.  There is obviously some theory behind portfolio management of these pensions but the logic doesn't make sense to me. 

 

Perhaps that creates another avenue for private equity with GM.  Apollo has some of their investments take a portion of the pension and invest in their funds.  It created a bit of a competitive advantage with something like AP Alternative with their fixed annuity business.

According to the 10k for the US pension the split is 16% equities, 60% debt and 24% alternative. I wouldn't call it heavily skewed into equities

 

You're right, I'm an idiot.  I recall going through the pension a couple years back and thought it was about 80% non fixed-income but I was wrong.

 

I guess we'll see how that pension looks in a few years.

[merkhet]

Also, remember that pension liabilities are determined based on "expected returns" rather than "actual returns."

 

Pension accounting is really Alice in Wonderland...

[RadMan24]

Also, remember that pension liabilities are determined based on "expected returns" rather than "actual returns."

 

Pension accounting is really Alice in Wonderland...

 

It's a risk, but GM has got time on its side. 60% is fixed income, 16% equities, then the rest are hedge funds, private equity (froth land) and real estate.

 

GM's returns have hovered around ~11%. Expected returns are ~6.5% Discount rate ~4.5%. Double check my math, but for the most part, with benefits of around $5.5 to $5.2B over the next few years, achieving a return of high single digits would be enough to prevent additional cash inflows and hope that rates begin to "normalize" a little bit to close the funding gap.

[Arden]

achieving a return of high single digits would be enough to prevent additional cash inflows and hope that rates begin to "normalize" a little bit to close the funding gap.

 

How could they possibly reach high single digits when rising rates will hurt at least 60% of their portfolio? Did they say the fixed income side is only very short term?

[RadMan24]

Yea you're probably right, mid single rates are more likely. Either way, its something as an investor you are going to have to monitor going forward anyway. If returns drop off, expect greater cash contributions. If they remain modest, they'll have additional cash flow. DTA and NOLs will free up some cash to help mitigate these concerns. It's a manageable liability, in my opinion.

[Arden]

China auto sales fall to 17 Month low despite price cuts

 

http://bloom.bg/1Mhmoxn