GM - General Motors

[Guest MarkS]

You Goooo girl. Love that Mary B!

[physcdisp]

Large debt on the balance sheet and about $27B pension liability seems to weigh on the stock.  Also, until this issue dies down, folks are on the sidelines.  long GM.

 

http://www.bloomberg.com/news/articles/2016-01-12/gm-faulty-switch-trial-begins-with-claim-of-cover-up-and-fraud

[Mephistopheles]

Large debt on the balance sheet and about $27B pension liability seems to weigh on the stock.  Also, until this issue dies down, folks are on the sidelines.  long GM.

 

http://www.bloomberg.com/news/articles/2016-01-12/gm-faulty-switch-trial-begins-with-claim-of-cover-up-and-fraud

 

GM has a huge net cash position in the auto business. Most of the debt you see is part of GM Financial.

[physcdisp]

Thanks.  Can't think of any other reasons, selling at historically (after reemergence from the bankruptcy) low multiple.  Why do you think it trades at such low multiple? 

[rico1181]

Maybe the market won't assign a higher market multiple until it sees GM sustain its current level of earnings despite a slowdown in the auto industry.

[Guest neiljgsingh]

Maybe the market won't assign a higher market multiple until it sees GM sustain its current level of earnings despite a slowdown in the auto industry.

 

I think this is spot-on. We're all fishing for catalysts that will allow GM to command a higher earnings multiple. Whether it's the recall expenses, debt from GM Financial, or something else that's keeping multiples depressed is really besides the point. GM has positioned itself to do very well over the next couple of years even if we are at peak SAAR. Current GMNA breakeven is 10.5-11mm cars, well below what it was pre-crisis, and labor costs (run-rate) are $5bn vs. $16bn in 2005. Lowest year of sales during the last crisis was ~9mm cars in 2009, so it would take a crisis roughly as severe as the last one for GM to lose money. Even then, with the net cash position from the auto business, GM will be able to take a hit if sales stay low for a couple of years.

 

Of course, it's difficult to see why we would run into such a severe recession again, and eventually the market will recognize the asymmetric risk/reward GM offers (have yet to mention the consistent increases in dividends (yield is approaching 5%) and continued buybacks through 2017). The stock is priced based on the assumption that something terrible will overrun the autos again as it did the last time, but GM is much stronger today than it was back then. This bullish view will not last, and whether it takes GM surviving another downturn or some other event, value itself will become the catalyst. We just don't know when.

[CorpRaider]

yeah, hopefully they can get a lot of this buyback done at seemingly depressed valuations.

[fareastwarriors]

Auto Executives Dismiss Fears of Plateau in Global Auto Demand

 

Detroit expects low oil prices to persist, driving demand for SUVs and trucks

 

 

 

http://www.wsj.com/articles/auto-executives-dismiss-fears-of-plateau-in-global-auto-demand-1452713128

[fareastwarriors]

fancy charts  ;D

http://www.bloomberg.com/graphics/2016-crossover-sales/

[LowIQinvestor]

Let me get this straight:

Earnings are set to rise by about 15% in 2016 (mid-point of their EPS range) ---Which they just raised.

 

They upped their dividend and buyback program.

 

The price of gas at the pump keeps going lower

 

Interest rates are not rising

 

Average age of vehicle on road is 11.5 years

 

GM just launched the most affordable EV with excellent range.

 

Conclusion: GM worth 5.5 times earnings?

[intothebreach]

Just to add to what LowIQinvestor just posted:

 

The automotive industry is where I started working, and eventually went back to manage a small 200-people plant for a Tier-1 supplier (to GM, among others). As a result of my direct dealing with GM (and Saturn), I have very little respect for this industry overall. It is structurally disadvantaged (massive capital reinvestment needs every 5-6 years), huge employee bargaining power, fairly regular public screw-ups (recalls, faulty parts, possible deaths, governmental inquiries, etc.) and so on. Products that improve very little from one generation to the next (environmental regulations are doing more to improve this industry than traditional players that prefer to bet on marketing trucks with guys with deep voices and fleet sales).

 

Even with that negative bias, I just invested in GM. Assuming that they do their buybacks at a share price of around $35-$40, the current p/e is ~4.5 based on Barra's revised EPS. And I'm being paid 4.8% in dividend to invest along Berkshire, Capital, Oakmark and Greenlight.

 

Either I'm missing something big, or GM is just plain stupid cheap.

[Dalal.Holdings]

Recency bias is the key reason why GM trades at steep discount to our estimation of fair value:

 

1) Recent bankruptcy means people think this is more likely to occur again. This is false as with plane crashes: after a plane crash, it often becomes safer to fly because the system learns from its mistakes. New GM is learning from mistakes (and much leaner) than old GM. Bankruptcy is less likely, but recency bias predominates.

 

2) Recent huge recession of 2008 (largest in >70 years) which was huge due to credit/financial crisis: people think that this is more likely to occur again soon (when the opposite is true: ie. it's a 1 in 70 year event for a reason) and that auto sales will collapse like in 2008 to 9M/year. Again, reference the plane crash example above. Our definition of recession is 2 consecutive quarters of negative GDP growth. We anticipate recession in the future--and most will be surprised by quickly it's over and how mild it is.

[racemize]

So, reading through the FCAU Goldman report, posted in the other thread, they appear to have a drastic decrease in earnings for GM in 2018 that isn't present for ford or fiat. (eg, future P/E of 10 for 2018 earnings). If that is actually expected, and I don't know why, then current prices would make sense. Is that an error, or does anyone have any insight?

[rishig]

So, reading through the FCAU Goldman report, posted in the other thread, they appear to have a drastic decrease in earnings for GM in 2018 that isn't present for ford or fiat. (eg, future P/E of 10 for 2018 earnings). If that is actually expected, and I don't know why, then current prices would make sense. Is that an error, or does anyone have any insight?

 

Racemize,

 

Maybe easier to call the Goldman analyst and ask him in person. I like to know how smart (or dumb) my "opponent" is and a call is a great way to find that out.

[LowIQinvestor]

So, reading through the FCAU Goldman report, posted in the other thread, they appear to have a drastic decrease in earnings for GM in 2018 that isn't present for ford or fiat. (eg, future P/E of 10 for 2018 earnings). If that is actually expected, and I don't know why, then current prices would make sense. Is that an error, or does anyone have any insight?

 

Can you share that report? I'm guessing that they are predicting a nasty recession ? Earnings cut in half!? Seems extreme...

 

Thanks

[tng]

So, reading through the FCAU Goldman report, posted in the other thread, they appear to have a drastic decrease in earnings for GM in 2018 that isn't present for ford or fiat. (eg, future P/E of 10 for 2018 earnings). If that is actually expected, and I don't know why, then current prices would make sense. Is that an error, or does anyone have any insight?

 

Thomson doesn't show any other analysts having the same opinion. The consensus is that earnings will be higher year after year. Considering GM has a $9B outstanding buyback, which is almost 20% of the market cap, logic points to EPS going up even if the car market softens because there are going to be less shares outstanding.

[oddballstocks]

So, reading through the FCAU Goldman report, posted in the other thread, they appear to have a drastic decrease in earnings for GM in 2018 that isn't present for ford or fiat. (eg, future P/E of 10 for 2018 earnings). If that is actually expected, and I don't know why, then current prices would make sense. Is that an error, or does anyone have any insight?

 

Can you share that report? I'm guessing that they are predicting a nasty recession ? Earnings cut in half!? Seems extreme...

 

Thanks

 

Don't have the report, but pulled up estimates on Bloomberg.

 

Growth compared to comps in all categories is weaker.

They've missed 7/8 on GAAP earnings

Missed 6/8 sales

Beat 5/8 EPS Adjusted

Beat 4/8 Adjusted Net Inc

 

12 analysts have it as a buy, 9 hold, 0 sell

 

target price $42

 

Looking at further estimates (they go to 2017) they're at $1.50/Q in GAAP EPS, $1.44/Q in Adjusted EPS, so a $6 run rate?  Analysts expect it to trade at a 5x P/E in 2016 and 2017.

 

Analysts expect sales to increase but gross margins to shrink over the next few years.  Right now consensus is earnings will grow 83% into next year.

[racemize]

So, reading through the FCAU Goldman report, posted in the other thread, they appear to have a drastic decrease in earnings for GM in 2018 that isn't present for ford or fiat. (eg, future P/E of 10 for 2018 earnings). If that is actually expected, and I don't know why, then current prices would make sense. Is that an error, or does anyone have any insight?

 

Racemize,

 

Maybe easier to call the Goldman analyst and ask him in person. I like to know how smart (or dumb) my "opponent" is and a call is a great way to find that out.

 

Here's the link from FCAU thread.  The Goldman guy is quoting other analysts from Goldman (I think anyway).  It just doesn't make any sense, so I suspect it was an error.  Perhaps someone has the corresponding GM goldman report? 

[tng]

I skimmed through the FCAU report. Their projected sales for GM doesn't even go down that much but EBIT gets cut in half. There is also clearly some type of bad comparison when he takes some other Goldman analyst's estimate (who seems to be expecting a slowdown in the auto market) to compare with his own projections for Fiat which has a lot of growth in sales. Sounds like one model is built with a negative macro call (even then, I don't know why GM's earnings would be cut in half if the revenue is down a few percent) while one is built with a positive one.

 

I don't see an active Goldman analyst estimate out for GM, so I don't know if it is possible to locate that report.

[LowIQinvestor]

I'm calling out massive BS on this Goldman report.

 

What if everyone is wrong about peak auto sales and GM does $6 EPS in 2017?

 

What's a reasonable multiple to pay? Historically, Toyota's PE has averaged about 11. I see no reason why GM couldn't be given a 9 PE.

 

Full disclosure: Buying GM warrants today

[racemize]

I skimmed through the FCAU report. Their projected sales for GM doesn't even go down that much but EBIT gets cut in half. There is also clearly some type of bad comparison when he takes some other Goldman analyst's estimate (who seems to be expecting a slowdown in the auto market) to compare with his own projections for Fiat which has a lot of growth in sales. Sounds like one model is built with a negative macro call (even then, I don't know why GM's earnings would be cut in half if the revenue is down a few percent) while one is built with a positive one.

 

I don't see an active Goldman analyst estimate out for GM, so I don't know if it is possible to locate that report.

 

I agree, the two models seem to be quite in conflict.  Although, the Ford ones don't drop, so isn't it isolated to just GM?  Why is it GM specific?

[Picasso]

I'd be cautious making any P/E comparison to Toyota.  They have historically been a AAA credit with massive advantages over GM, etc.  Toyota also does a good job of optimizing their balance sheet plus there are currency issues at play with the Yen.  There's some hedging in there plus the market was giving them a higher multiple as Japan moved to devalue the Yen.  That said I'm still not sure what multiple you give to GM.  Markets often gives 2x the multiple to the likes of a Toyota versus say GM. 

 

I think part of what's going on here, and it's some speculation on my part, is all the disruption going on in the auto category.  The cars coming out over the next several years will be more software based, more emphasis on reducing the historically large investment in a 95% dead asset, less profitable electric vehicles which will hurt servicing and parts back logs and massively increase capex, among various other things.  I think the next ten years will be extremely, extremely challenging for GM.  They are going to need to hire some really smart people who would rather work on those projects for BMW and Tesla.  Elon Musk was just on twitter trying to recruit that talent along with the move Apple is making into the space.  There's a real risk that this business will have a hard time generating free cash flow in 10-20 years since some of their competition isn't going to be completely rational about pursuing profits and there will be very large capex at some point in 2019+.

 

Anyway that is more longer term but I'm reminded that Kodak traded for 7-8x in 2000.  It was a popular value investment then and the multiple to pay for there to be a margin of safety was 1x earnings. 

[rishig]

There's a real risk that this business will have a hard time generating free cash flow in 10-20 years since some of their competition isn't going to be completely rational about pursuing profits and there will be very large capex at some point in 2019+.

 

Anyway that is more longer term but I'm reminded that Kodak traded for 7-8x in 2000.  It was a popular value investment then and the multiple to pay for there to be a margin of safety was 1x earnings.

 

And at 6x P/E, we should be thinking about what GM's free cash flow will be in 10-20 years, because you believe that GM is on its way to be the next Kodak. Is there any evidence of any sort to believe that?

[Picasso]

I don't think GM is necessarily the next Kodak.  I just think free cash flow is going to dry up at some point in the somewhat near future.  Just look at what Tesla will be spending on capex today, much less in the future as they generate more cash flow. 

 

Look at what Tesla is doing with every single car that leaves their factory:

 

 

 

And this is from update 7.1.  Not update 8.0 or 9.0.  7.1.  They don't need to spend money running ads they just develop better and better software on a platform that lets them create these various selling points for a car which will cost $35k in the near future.  GM (and others) are going to need to lower their profits in order to compete with what is coming out into the market over the next few years.  No Tesla owner thought they would have the "summon" feature available so soon.  Do you really think GM is going to be able to suddenly compete in all the ways Apple or Tesla will make consumers become more picky about choosing a vehicle?

 

If Tesla (and others that will likely be funded by Apple, Google, etc) will not be rationale about pursuing profits, then don't we just have another Amazon versus "pick your retailer" on our hands?  GM will be forced to use their free cash flow to completely change the way they approach consumers based on changing consumer tastes.

 

Anyway it's hard to know what the right multiple or future cash flow looks like.  I just don't think it's as easy as saying 6x, 7x, etc etc.  You have to think they can effectively compete in what will be a completely different market in the not so distant future.

[LowIQinvestor]

I don't think GM is necessarily the next Kodak.  I just think free cash flow is going to dry up at some point in the somewhat near future.  Just look at what Tesla will be spending on capex today, much less in the future as they generate more cash flow. 

 

Look at what Tesla is doing with every single car that leaves their factory:

 

 

 

And this is from update 7.1.  Not update 8.0 or 9.0.  7.1.  They don't need to spend money running ads they just develop better and better software on a platform that lets them create these various selling points for a car which will cost $35k in the near future.  GM (and others) are going to need to lower their profits in order to compete with what is coming out into the market over the next few years.  No Tesla owner thought they would have the "summon" feature available so soon.  Do you really think GM is going to be able to suddenly compete in all the ways Apple or Tesla will make consumers become more picky about choosing a vehicle?

 

If Tesla (and others that will likely be funded by Apple, Google, etc) will not be rationale about pursuing profits, then don't we just have another Amazon versus "pick your retailer" on our hands?  GM will be forced to use their free cash flow to completely change the way they approach consumers based on changing consumer tastes.

 

Anyway it's hard to know what the right multiple or future cash flow looks like.  I just don't think it's as easy as saying 6x, 7x, etc etc.  You have to think they can effectively compete in what will be a completely different market in the not so distant future.

 

Would you mind elaborating on the following:?

"They don't need to spend money running ads they just develop better and better software on a platform that lets them create these various selling points for a car which will cost $35k in the near future"

 

How soon will Telsa be selling a $35k vehicle?

Thanks,