GM - General Motors

[CorpRaider]

Yeah, $1.50 eps, ex recall costs.  Man, I don't get how this is not in the $40s.

[Guest MarkS]

Now that the recall crises is at an end  I'm hoping she raises the dividend - that should drive the stock price higher.

[RadMan24]

But if it stays lower, what's the rush???

[ratiman]

The problem is not with their calculation, it is just that the balance sheet is not a good representation of the economics of the company. The adjustments they do make sense. Pension obligations are similar to debt and needed to be added back. DTA is not an operating asset and needed to be removed.

 

- Their equity got wiped out during bankruptcy and New GM does not really reflect the equity that is needed to reproduce the company. So equity is understated. So their starting point itself is problematic.

- They generate $2 billion in net income from chinese JV on equity of about $8 billion. This is a gross misrepresentation of the economics of the business there.

 

So I really do not give much consideration for their ROIC metric.

 

Vinod

 

Why not look at the pension and DTA assets separate from the business? It doesn't seem like either reflects the core economics of the business. Not really following the argument here.

[vinod1]

The problem is not with their calculation, it is just that the balance sheet is not a good representation of the economics of the company. The adjustments they do make sense. Pension obligations are similar to debt and needed to be added back. DTA is not an operating asset and needed to be removed.

 

- Their equity got wiped out during bankruptcy and New GM does not really reflect the equity that is needed to reproduce the company. So equity is understated. So their starting point itself is problematic.

- They generate $2 billion in net income from chinese JV on equity of about $8 billion. This is a gross misrepresentation of the economics of the business there.

 

So I really do not give much consideration for their ROIC metric.

 

Vinod

 

Why not look at the pension and DTA assets separate from the business? It doesn't seem like either reflects the core economics of the business. Not really following the argument here.

 

We need to ignore DTA per the reasons you mentioned.

 

But we need to include pensions as they are just another form of compensation - which I think you agree is somewhat relevant to the economics of the business  :)

 

Vinod

[ratiman]

The problem is not with their calculation, it is just that the balance sheet is not a good representation of the economics of the company. The adjustments they do make sense. Pension obligations are similar to debt and needed to be added back. DTA is not an operating asset and needed to be removed.

 

- Their equity got wiped out during bankruptcy and New GM does not really reflect the equity that is needed to reproduce the company. So equity is understated. So their starting point itself is problematic.

- They generate $2 billion in net income from chinese JV on equity of about $8 billion. This is a gross misrepresentation of the economics of the business there.

 

So I really do not give much consideration for their ROIC metric.

 

Vinod

 

Why not look at the pension and DTA assets separate from the business? It doesn't seem like either reflects the core economics of the business. Not really following the argument here.

 

We need to ignore DTA per the reasons you mentioned.

 

But we need to include pensions as they are just another form of compensation - which I think you agree is somewhat relevant to the economics of the business  :)

 

Vinod

 

Still not following. Why not treat the pension as just another liability, separate from the core business? It is a form of deferred compensation, but nothing changes if we call the pension liability "debt" instead of "deferred wages." Likewise, it would make no sense to recognize pension gains as income. 

[Shooter MacGavin]

Hello all, this is my first ever post.  I've been creeping for a few years.

 

I think one has to consider the point of the ROIC calc and make adjustments.  Since GM is a mature business and doesn't really deploy too much incremental capital into the business, the ROIC as presented isn't very useful for understanding incremental growth.  (The earnings growth is coming from greater units sold in North America and China which are financed primarily by working capital.  The other big driver of earnings growth is actually cost cutting, or by free'ing up capital.)  It may be useful internally, but its not terribly useful to outside investors, in my view.

 

To me the point of measuring returns on capital employed is to compare GM's business advantage over other automotive companies.  In this case, the returns must be calculated in a comparable fashion to other companies. However, certain balance sheet items are wonky of course.  DTAs, pensions (which are a legacy issue), etc, revalued land post bankruptcy, goodwill, difference in leverage of the captive financing arm.  I think GM is trying to adjust for this, but starting from book equity is weird and adding back pension liability certainly doesn't make sense if you're trying to compare performance vs. other auto companies.  Additionally, the JV's are going to be problematic since we don't have the "debt" portion of their capital and the income is booked after tax but added to Adj. EBIT.  Anyway, blah blah...

 

if the exercise is to compare GM's raw economics (on capital efficiency) vs. Ford vs. VW vs. FCAU etc....I think you should put them all on an equal footing, and just compare the return on adj. assets (assets should exclude excess cash, goodwill, dtas, and captive financing assets)..the ebit should exclude the JV income/loss component...I think if you do this you find that GM is more profitable than Ford, and many others, and yet GM has more material optimization to go than does Ford.

 

Thoughts?   

 

 

[vinod1]

Hello all, this is my first ever post.  I've been creeping for a few years.

 

I think one has to consider the point of the ROIC calc and make adjustments.  Since GM is a mature business and doesn't really deploy too much incremental capital into the business, the ROIC as presented isn't very useful for understanding incremental growth.  (The earnings growth is coming from greater units sold in North America and China which are financed primarily by working capital.  The other big driver of earnings growth is actually cost cutting, or by free'ing up capital.)  It may be useful internally, but its not terribly useful to outside investors, in my view.

 

To me the point of measuring returns on capital employed is to compare GM's business advantage over other automotive companies.  In this case, the returns must be calculated in a comparable fashion to other companies. However, certain balance sheet items are wonky of course.  DTAs, pensions (which are a legacy issue), etc, revalued land post bankruptcy, goodwill, difference in leverage of the captive financing arm.  I think GM is trying to adjust for this, but starting from book equity is weird and adding back pension liability certainly doesn't make sense if you're trying to compare performance vs. other auto companies.  Additionally, the JV's are going to be problematic since we don't have the "debt" portion of their capital and the income is booked after tax but added to Adj. EBIT.  Anyway, blah blah...

 

if the exercise is to compare GM's raw economics (on capital efficiency) vs. Ford vs. VW vs. FCAU etc....I think you should put them all on an equal footing, and just compare the return on adj. assets (assets should exclude excess cash, goodwill, dtas, and captive financing assets)..the ebit should exclude the JV income/loss component...I think if you do this you find that GM is more profitable than Ford, and many others, and yet GM has more material optimization to go than does Ford.

 

Thoughts? 

 

Shooter MacGavin,

 

Welcome to the board.

 

Terrific post. You said it much better that what I am trying to say.

 

Vinod

 

 

[vinod1]

The problem is not with their calculation, it is just that the balance sheet is not a good representation of the economics of the company. The adjustments they do make sense. Pension obligations are similar to debt and needed to be added back. DTA is not an operating asset and needed to be removed.

 

- Their equity got wiped out during bankruptcy and New GM does not really reflect the equity that is needed to reproduce the company. So equity is understated. So their starting point itself is problematic.

- They generate $2 billion in net income from chinese JV on equity of about $8 billion. This is a gross misrepresentation of the economics of the business there.

 

So I really do not give much consideration for their ROIC metric.

 

Vinod

 

Why not look at the pension and DTA assets separate from the business? It doesn't seem like either reflects the core economics of the business. Not really following the argument here.

 

We need to ignore DTA per the reasons you mentioned.

 

But we need to include pensions as they are just another form of compensation - which I think you agree is somewhat relevant to the economics of the business  :)

 

Vinod

 

Still not following. Why not treat the pension as just another liability, separate from the core business? It is a form of deferred compensation, but nothing changes if we call the pension liability "debt" instead of "deferred wages." Likewise, it would make no sense to recognize pension gains as income.

 

Shooter MacGavin has done a much a better job of laying out the rationale.

 

Also qualitatively my assessment is that GM and most other auto companies do not really have any moat. When business is good and there are tailwinds, they make good returns on capital but over the full cycle they would earn average to just above average returns. So I am not looking at ROIC too closely or giving much credence to these point in time calculations.

 

I am just looking at what normalized earnings are likely to be and capitalize them at a low multiple. If I can get a good MOS to this value, I buy.

 

Vinod

 

Vinod

[Guest neiljgsingh]

Hi all, excited to join the Corner community in my first post.

 

I was fortunate enough to attend the Pabrai Funds annual meeting this year in Chicago, and he said that GM was trading at 4x earnings. I tried adding certain items (cash, etc.) from the roughly 13x number you'll find on Google Finance but couldn't seem to get to just 4x. I realize the meeting was a little over a month ago when it was trading around $29-30, but I still can't seem to figure out how Pabrai got to such a low multiple. Any ideas on what might be useful in valuing GM on an earnings basis, or perhaps what you think might be a more relevant/accurate proxy? I'm trying to figure out how much juice this baby still has left in it over the next few years. Would you be comfortable with the margin of safety if you were to initiate now?

[Shooter MacGavin]

The problem is not with their calculation, it is just that the balance sheet is not a good representation of the economics of the company. The adjustments they do make sense. Pension obligations are similar to debt and needed to be added back. DTA is not an operating asset and needed to be removed.

 

- Their equity got wiped out during bankruptcy and New GM does not really reflect the equity that is needed to reproduce the company. So equity is understated. So their starting point itself is problematic.

- They generate $2 billion in net income from chinese JV on equity of about $8 billion. This is a gross misrepresentation of the economics of the business there.

 

So I really do not give much consideration for their ROIC metric.

 

Vinod

 

Why not look at the pension and DTA assets separate from the business? It doesn't seem like either reflects the core economics of the business. Not really following the argument here.

 

We need to ignore DTA per the reasons you mentioned.

 

But we need to include pensions as they are just another form of compensation - which I think you agree is somewhat relevant to the economics of the business  :)

 

Vinod

 

Still not following. Why not treat the pension as just another liability, separate from the core business? It is a form of deferred compensation, but nothing changes if we call the pension liability "debt" instead of "deferred wages." Likewise, it would make no sense to recognize pension gains as income.

 

Shooter MacGavin has done a much a better job of laying out the rationale.

 

Also qualitatively my assessment is that GM and most other auto companies do not really have any moat. When business is good and there are tailwinds, they make good returns on capital but over the full cycle they would earn average to just above average returns. So I am not looking at ROIC too closely or giving much credence to these point in time calculations.

 

I am just looking at what normalized earnings are likely to be and capitalize them at a low multiple. If I can get a good MOS to this value, I buy.

 

Vinod

 

Vinod

 

Vinod, thank you the kind accolade! 

 

Again, just to be clear, it's my view that the underfunded pension has little place in an ROIC calcuation, if the ROIC is to be meaningful for determining GM's performance relative to other Auto OEMs.

 

That does not mean the underfunded pension liability has no place in a valuation.  From a valuation vantage point, to be conservative, I would probably subtract it from my enterprise value (before pension expense), to arrive at my per share equity value. 

[Shooter MacGavin]

Hi all, excited to join the Corner community in my first post.

 

I was fortunate enough to attend the Pabrai Funds annual meeting this year in Chicago, and he said that GM was trading at 4x earnings. I tried adding certain items (cash, etc.) from the roughly 13x number you'll find on Google Finance but couldn't seem to get to just 4x. I realize the meeting was a little over a month ago when it was trading around $29-30, but I still can't seem to figure out how Pabrai got to such a low multiple. Any ideas on what might be useful in valuing GM on an earnings basis, or perhaps what you think might be a more relevant/accurate proxy? I'm trying to figure out how much juice this baby still has left in it over the next few years. Would you be comfortable with the margin of safety if you were to initiate now?

 

If Google Finance has 13x, it is probably on trailing P/E, which includes some litigation accruals and ignition switch non-recurring expense accruals.  GM guided to $5.00 - $5.50 in run-rate EPS next year (2016).  So at the midpoint of $5.25 (which is around where I get to as well), the P/E multiple, when the stock was as $30, was closer to 5.7x.  Of course, one should probably exclude the value of the deferred tax assets (DTAs) since the $5.25 estimate includes an accrual for taxes, but in truth they won't pay US federal taxes for the next 4-5 years roughly. 

 

The present value of these DTAs by my math ends up being worth around 4-5 per share.  Of course this is very subjective.

 

Therefore, at $30, I suspect Pabrai was also excluding the present value of the DTAs to arrive at his 4x P/E multiple.  Today at ~$36, the multiple is ~5.9x (ex-DTAs). 

 

In terms of MOS, let me ask you this:  how much would you pay for an admittedly cyclical business that is likely to remain be profitable even in recessionary conditions (in the US), where the run rate earnings growth is likely to increase 25-30% by 2018 on materials optimization alone (which means there is growth plus ~100% of the earnings left over for dividends and share repurchases)?  repurchases will increase EPS by another ~10-12% by 2018.  I would pay 11x, and would think I'm getting a steal.  that's just me.  If I get to 11x, I've got a double.  By 2018, I've got another 50-60% on earnings. and then I've got 3 years of dividends too.  That's plenty of safety for me to be wrong (which is often the case) and still do pretty well, i'd hope.

[AJB96]

Hi all, excited to join the Corner community in my first post.

 

I was fortunate enough to attend the Pabrai Funds annual meeting this year in Chicago, and he said that GM was trading at 4x earnings. I tried adding certain items (cash, etc.) from the roughly 13x number you'll find on Google Finance but couldn't seem to get to just 4x. I realize the meeting was a little over a month ago when it was trading around $29-30, but I still can't seem to figure out how Pabrai got to such a low multiple. Any ideas on what might be useful in valuing GM on an earnings basis, or perhaps what you think might be a more relevant/accurate proxy? I'm trying to figure out how much juice this baby still has left in it over the next few years. Would you be comfortable with the margin of safety if you were to initiate now?

 

There are multiple ways to think about it. Here are my back of the envelop numbers:

 

At a $30 stock price GM has a market cap of $47.5 billion.

 

Net auto cash:                  (-) $13.5 billion

US pension underfunding: (+)  $10.3 billion. GM has no funding requirement going forward and this liability goes to zero with a 1% rise in interest rates. I'm including it anyway.

 

EV: $44.3 billion

 

I think it's fair to value the finance arm at $10 billion. GM Financial should do operating earnings of $1 billion/ year going forward with managements stated goal of $2 billion/ year by 2018.

 

Thus the EV of the auto business is $34.3 billion.

 

YTD adj EBIT:                                $8,049m

Restructuring included in above:    $500m

Minus GM Financial contribution:  ($670m)

Total:                                            $10,505m (annualized)

 

Capex should exceed depreciation by $1.5 billion for the year.

 

GM auto FCF: $9 billion

 

GM auto EV ($34.3) / GM auto FCF ($9) = less than 4x earnings.

GM EV of $44.3 billion / total company FCF of $9.9 billion = 4.5x earnings.

 

This includes Europe losses of $515m YTD ($687m annualized). GME should be profitable next year.

 

Attached I go into a bit more detail.

 

Alex

 

GM_Numbers.pdf

[Guest neiljgsingh]

Thanks for all the replies. They've been extremely helpful!

[Guest MarkS]

October sales numbers out. Crushes estimates.

[AJB96]

Barrons: General Motors Revival is Here to Stay

 

http://www.barrons.com/articles/general-motors-revival-is-here-to-stay-1446873751

[DCG]

Barron's is wrong nearly constantly though.

[Jurgis]

Barron's is wrong nearly constantly though.

 

Do you have data to substantiate this or is this anecdotal?

 

They usually have year end review that shows pretty good results of their recommendations absolutely and vs. index. However, the review results are per column, so it's harder to get a total picture. Also their recommendations are not a portfolio, which distorts the results clearly. Overall, I would be hesitant to believe blanket opinions that "Barron's is wrong nearly constantly"

[Guest MarkS]

I hold a rather nervous position in GM.  I had thought that the bankruptcy filing a few years back would protect them against most of the ignition switch claims.  Now I'm not so sure.  http://www.nbcnews.com/business/autos/plaintiffs-gm-ignition-switch-cases-can-seek-punitive-damages-judge-n460141

Has anyone looked at the repercussion of this recent court ruling?

Thanks

Mark

[Shooter MacGavin]

I wouldn't rely on a journalist's interpretation of the court ruling.  It's pretty complicated.  I can't pretend to understand it enough to be able to explain it with complete clarity so what I say here should be taken with some caution.  I have attached it here so any lawyers in the house, please feel free to take a stab and enlighten us.  But it sounds like Judge Gerber is clarifying the rules around when New GM can and cannot be held liable for punitive damages based on bankruptcy protection as they get sued in other courts, which is of course what all these greedy class action lawyers want.

 

So the crux of his point is that there are instances when New GM can be held liable and it isn't because its automatically a successor company, but rather if the behavior or conduct of its employees who were formerly at Old GM carries over in a damaging way to customers at New GM.

 

Here are a few examples that the court is citing from its earlier "belsdoe" decision:

 

Preliminarily, nobody appears to quarrel with the Court’s statements in its Bledsoe Decision when speaking of the Court’s intent when issuing the April Decision.

 

In the Bledsoe Decision, the Court stated:

 

But what this Court had in mind when it previously

ruled as it did should not be in doubt. This Court assumed that things New GM did, or knowledge

New GM personnel had when acting for New GM

(even if those personnel acquired that knowledge

while acting for Old GM) would be fair game.

 

The Court continued with two examples:

For example, if such were actionable under

applicable nonbankruptcy law, New GM could still

be held liable, consistent with this Court's ruling,

for knowingly installing a part it knew to be

defective even if the part had been made by Old

GM—just as New GM might be liable for doing

that if the part had been manufactured by another

manufacturer in the Supplier Chain—and likewise

could be held liable for refusing to make a repair

that New GM knew had to be made, no matter when

its personnel acquired the requisite knowledge.

 

And the Court further stated that

New GM would have to live with the knowledge its

personnel had from the earliest days they began to

serve New GM…

 

Those statements described the Court’s views when it issued the April Decision and

Judgment, and still do.

 

I think its going to get messy.  This ruling will empower Hagens Berman to try to find anyway to use Judge Gerber's "imputation" doctrine to tie personnel from Old GM to New GM.

 

I think it will eventually come to a meaty settlement.  Let's say it ends up costing an exorbitant, unlikely, $10B to GM in punitive damages.  It doesn't matter what juries award, but punitive damages are, as a general rule, reduced by courts to no more than 10:1 of compensatory damages.  Remember they paid out roughly $600M in damages for loss of life and disability. Well there's insurance to cover part of it.  But let's assume there's not.  $10B is still only ~$4.75 in EPS,after tax.  That sucks because that's a year's worth of earnings.  But my target price by 2018 or 2019 is in the $80-100 range including dividends.  So at today's price of $35, after paying out $4.65, I'm still going to make 2.7x my money.  That's still not too shabby.

 

How I get to ~$100 is a discussion for another day.

 

 

Nov_9_judge_gerber_court_opinion.pdf

[Guest MarkS]

Thanks for the feedback, Shooter.

Mark

[Shooter MacGavin]

after giving it a couple of reads, I feel like it rules relatively favorably for GM.  But mostly its about setting the rules of engagement:

 

In my view, this is the most important part:

(1) Under the April Decision and Judgment, knowledge of New

GM personnel, whenever acquired, may be imputed to New GM. But

knowledge of Old GM personnel may not be imputed to New GM except

-3-

on assumed Product Liabilities Claims or to the extent that it can be shown

(e.g., because it is the knowledge of the same employee or because it was

communicated to a New GM employee) that New GM had such

knowledge too.

 

 

Punitive damages may be sought against New GM to the extent—but only the extent—they are based on

New GM knowledge and conduct alone.

 

In other words, there are strict limits on the path for punitive damages based on conduct of Old GM. 

[Guest neiljgsingh]

Great analysis and thanks for attaching the court ruling, Shooter. Care to walk us through your valuation? I'm a huge bull, but the $100 mark never crossed my mind. Would love to hear your line of thinking if you're willing to share.

[Shooter MacGavin]

yup.  I suggest you read the Goldman transcript from a few days ago with Chuck Stevens.  But basically he lays most of it out there.  Not much new but nice to have it in one place.

 

Start with FY16 guidance of roughly $8-9B in Net Income. For the numbers below, lets do pre-tax.  We'll true up after:

add: ~2-$3B of material costs minus reinvestment in engineering through 2018.  Let's say half is saved.  So $1.5B of net savings run rate.

 

add:  $800M by 2018 of GMF  due to doubling of profit by forcing dealers to use GMF exclusively for leases, as well as increasing the target leverage, as well as providing better financing terms for dealers and customers.

 

add: some amount from pricing improvements due to a heavy product refresh cycle over the next few years.  But then there is carryover pricing from trucks as a meaningful drag. So who knows..maybe that gets you $1B additionally overall (60 bps of revenue improvement to $155B in annual consolidated revenue in 3 years..you could say I'm being very conservative)

 

add: meaningful heavy pickup truck tailwind yet to go.  this is talked about sometimes by Ford.  Rarely mentioned at GM.  Yet, pickup trucks are dependent on home construction, and housing starts are way below household formation.  Not only that, but the trucks on the road are extremely old on average.  The Citi analyst, Itay Micheli has done some work on this. There's definitely a few newspaper articles on this as well.  But basically, you can expect truck sales to increase in line with home starts and they're maybe 20-25% below normal. at $10k profit minus capacity expansion. This gives me $1.0 - $2.0B additional in pre-tax income by 2018 - 2019.  The word on the street is that heavy duty pickup trucks do about $10k in profit.  By my math and observation, I think it's closer to 15-18k.  But I'll stick with 10k for this exercise.

 

Let's forget about getting to breaking even in GMIO ex-China, GMSA or any increases in China profit, since they're all fleeting near-term.  Let's also forget about Europe profit increasing beyond 2017 or any market share gain from the highly profitable Cadillac. These are all "nice to haves".

 

But if I tally up the profit that is run-rate by 2018:

2016: $8.5B ($5.25 midpoint of guidance * 1.6B shares)

 

Add:  $1.5B net incremental cost savings

Add:  $0.8B net GMF contribution

Add:  $1.0B pricing from mega product refresh net of carryover drag

Add:  $1.5B truck cycle contribution halfway to normal

 

= 4.8B *.75 = $3.6B post-tax incremental profitability

 

so by the end of FY18, they should earn an incremental $2.25 per share.  (=3.6/1.6)

 

Add:  GM thinks they will have 6-7B of run-rate FCF starting in 2016, and as long as they spend the incremental cash flow on buybacks, and not dividends as they so foolishly have...they should have about ~$4B going forward in 2016 to spend on buybacks after spending 2.3B in dividends (let's ignore the 2.5B left to spend this year).  That's up to the board, but it sounds like Chuck Stevens is in favor of buybacks.

 

if they spend $4B in '16, '17, '18 on buybacks, at let's say $40 per share on average, that's an incremental 18% to EPS.

 

Therefore, by 2018,

 

$5.25 in EPS  (midpoint of 2016 guidance)

$2.25 in EPS from above math

= $7.50 in EPS before repurchases

x 1.18 for repurchases

 

= $8.85 run-rate in EPS by end of 2018

 

let's slap a below market, cyclical industry multiple of 10-11x on that..gives me $88 - $97 per share.

and remember, I collected roughly a buck (after paying 30%) each year along the way in dividends. 

 

So my actual return at the high point is $100.

 

Who knows how much they pay in litigation? But hopefully it won't make too big a dent in the thesis. 

 

The assumptions here are that US SAARs have to remain intact, and that they don't keep giving up volume in China.  Additionally, if interest rates rise, that could be bad for demand (although good for GMF somewhat).  I'm also cheating and assuming they can get away with $40 per share in buybacks and then the price rockets to $100...i don't know how much they will be able to do, but it should be a low to high teens number hopefully.

 

 

[Steven B]

Great post wbr.

 

Capex was $8 billion in 2012 and $7.5 billion in 2013 according to the annual reports. They mentioned at their investor day that they expect capex to be ~5% of revenue in a run-rate basis according to someone (can't remember who I'm afraid) earlier in is thread, which would be in line with he last two years.

 

So I'm differentiating from the run-rate and the maintenance cap-ex. The former almost certainly prices in growth cap-ex while the latter does not, and I think the run-rate you're referencing is probably inclusive of growth cap-ex.

 

In any case, if you take the % of revenue as cap-ex over the last decade for Ford, you get 4% of revenues, and I suspect that you have a bit of growth cap-ex in that average as well.

 

2009 3.86%

2010 3.17%

2011 3.15%

 

Those are the lowest % for cap-ex during the last decade for Ford. There's probably no growth-cap ex in those numbers.

 

My guess is that maintenance cap-ex for GM is closer to $5 billion than $8 billion.

 

Not  to bring up old stuff but Iwanted to get everyone's perspective. I would argue that basically all Auto CAPEX is  maintenance CAPEX. You need newer models to maintain your market share, period. If you were adding capacity maybe but even then it's such a crap shoot. The only time you can really  consider it growth CAPEX is when you use you spend extra to speed up the cadence in my humble opinion.

 

Thoughts?