GM - General Motors

[rohitc99]

Good news?  Stock down.

 

Bad news?  Stock down.

 

No news?  Stock down.

At current valuations, GM will be disrupted fully out of business in 3-4 years with NA going to 0  ;)

 

In light of this fact, this all makes complete sense

[Picasso]

I think people are ignoring the impact of what's happening with their underfunded pension liability in this market.  I haven't look at the numbers recently, but it wouldn't surprise me to see a $5-6 billion increase in that liability (maybe even more over the next year as previous improvements reverse and likely get bigger than before).  Holding a constant EV/EBITDA you're going to see a reduction in the market cap by a similar amount. There's probably some floor on the P/E multiple at some point (especially with the dividend yield) but clearly that's going to have a big impact on the valuation here. 

[LowIQinvestor]

I think people are ignoring the impact of what's happening with their underfunded pension liability in this market.  I haven't look at the numbers recently, but it wouldn't surprise me to see a $5-6 billion increase in that liability (maybe even more over the next year as previous improvements reverse and likely get bigger than before).  Holding a constant EV/EBITDA you're going to see a reduction in the market cap by a similar amount. There's probably some floor on the P/E multiple at some point (especially with the dividend yield) but clearly that's going to have a big impact on the valuation here. 

U.S. pension obligation decreased approximately $5 billion

The U.S. plans are approximately 85% funded

[Picasso]

That's end of last year, my point is that the future doesn't look good for the underfunded pension liability.

[TwoCitiesCapital]

I think people are ignoring the impact of what's happening with their underfunded pension liability in this market.  I haven't look at the numbers recently, but it wouldn't surprise me to see a $5-6 billion increase in that liability (maybe even more over the next year as previous improvements reverse and likely get bigger than before).  Holding a constant EV/EBITDA you're going to see a reduction in the market cap by a similar amount. There's probably some floor on the P/E multiple at some point (especially with the dividend yield) but clearly that's going to have a big impact on the valuation here. 

U.S. pension obligation decreased approximately $5 billion

The U.S. plans are approximately 85% funded

 

Not if rates keep dropping....

[prevalou]

It is corporate rates that count, not treasury rates to value the pension fund liabilities

[merkhet]

Also, pension accounting is... difficult... to say the least. It's not actual results that count towards the account, but expected return on assets that counts.

[DTEJD1997]

Hey all:

 

I don't know the exact figures today...but a few years ago some people in the know were arguing that GM is really owned by the retirees.  The common stock is really just a stub.

 

GM made a mess of their business.  Will they make a mess of their pension obligations?  Will they make a mess of their business in the future?  Based on my past experience I don't have much confidence.

 

I think many, many investors have been burned on GM in the past.  The market is skittish on this one.

 

Maybe this time will be different...

[Steven B]

That's end of last year, my point is that the future doesn't look good for the underfunded pension liability.

 

Picasso, would I mind elaborating on why you think the Pension Liability is going to explode?

[Picasso]

I don't want to imply that the liability is going to suddenly go supernova but I'd take a look at the logic that has been discussed by shareholders of GM.

 

==> Rates of return are currently low, they will go up over time and reduce the pension liability.  As the fed reduces easing policy you'll see rates of return go up, and so on.

 

I'd say that was probably a good bet with rates very low.  But look at where we are today.

 

1) The fed has largely stopped easing and has raised rates only 25 bps.  Where are risk free rates today?  Lower than they have almost ever been.  And that's with the fed starting to take their foot off the gas.  I thought rates were low because the fed was keeping them low?  Well here we are and rates are low because growth freaking sucks.  In fact, the less the fed tries to keep rates low the lower they will probably go.

 

2) There's like 6 trillion USD of bonds giving negative nominal rates of return.  And there is GM with a 6.5% expected rate of return on their pension assets.  Are they really going to earn 500 bps over?  When have they ever earned 500 bps over?  There's a reason why they've always had this problem despite massive capital market returns for the past thirty years.

 

Anyway I'm not a macro betting kind of guy but that's not the kind of backdrop that tells me their pension liability is going to shrink.  Maybe in accounting terms but not in real economic terms.  It's going to be nearly impossible for these massive pensions to earn 6.5% rates of return in this environment.  I think others will disagree with this and perhaps they are right.  But I'd say this is starting to get discounted into the price of the equity and something which shouldn't be ignored.  The plan is so large that a couple hundred basis point change in the expected returns can negate 30-40%* of the equity value which has already started to take place.  It's not in the 10-K's yet but it's a real cost that seems to get more real everyday.

 

It is a bit retarded that GM left bankruptcy with such a large pension shortfall.  But I guess that's the price of the government bailout.

 

* Depends on where the equity is priced and the market multiples on EBITDA these automakers trade at

[RadMan24]

I don't want to imply that the liability is going to suddenly go supernova but I'd take a look at the logic that has been discussed by shareholders of GM.

 

==> Rates of return are currently low, they will go up over time and reduce the pension liability.  As the fed reduces easing policy you'll see rates of return go up, and so on.

 

I'd say that was probably a good bet with rates very low.  But look at where we are today.

 

1) The fed has largely stopped easing and has raised rates only 25 bps.  Where are risk free rates today?  Lower than they have almost ever been.  And that's with the fed starting to take their foot off the gas.  I thought rates were low because the fed was keeping them low?  Well here we are and rates are low because growth freaking sucks.  In fact, the less the fed tries to keep rates low the lower they will probably go.

 

2) There's like 6 trillion USD of bonds giving negative nominal rates of return.  And there is GM with a 6.5% expected rate of return on their pension assets.  Are they really going to earn 500 bps over?  When have they ever earned 500 bps over?  There's a reason why they've always had this problem despite massive capital market returns for the past thirty years.

 

Anyway I'm not a macro betting kind of guy but that's not the kind of backdrop that tells me their pension liability is going to shrink.  Maybe in accounting terms but not in real economic terms.  It's going to be nearly impossible for these massive pensions to earn 6.5% rates of return in this environment.  I think others will disagree with this and perhaps they are right.  But I'd say this is starting to get discounted into the price of the equity and something which shouldn't be ignored.  The plan is so large that a couple hundred basis point change in the expected returns can negate 30-40%* of the equity value which has already started to take place.  It's not in the 10-K's yet but it's a real cost that seems to get more real everyday.

 

It is a bit retarded that GM left bankruptcy with such a large pension shortfall.  But I guess that's the price of the government bailout.

 

* Depends on where the equity is priced and the market multiples on EBITDA these automakers trade at

 

It's not as bad as it looks. There is previous discussion of that deep in this thread.

[loganc]

Why is anyone trying to value this based on EPS?  It appears to me that FCF is much lower.

 

For example, management provides an "adjusted automotive free cash flow" of 2.2B for 2015 (3.1B for 2014).  I realize that this discounts the value of the finance arm.  But, how do you want to value GM finance?  Some multiple of book?  I don't know.

 

Ultimately, I think GM represents a business that generates far less in FCF than reported GAAP net income with very limited near term growth prospects.  I don't think it is close to as "cheap" as many think (e.g. Pabrai slide deck showing >10B of FCF).

 

     

[prevalou]

adjusted free cash flows in 2014 and 2015 are impacted by the recalls and tax changes. What about the future ?

 

"For the year ending December 31, 2016 we expect to continue to generate strong consolidated financial results including improved EBIT-adjusted and

EBIT-adjusted margins, EPS-diluted-adjusted of between $5.25 and $5.75 and automotive adjusted free cash flow of approximately $6 billion.

Our overall financial targets include expected improvement of forecasted consolidated EBIT-adjusted margins of 9% to 10% by early next decade;

expected total annual operational and functional cost savings of $5.5 billion by 2018 that will more than offset our incremental investments in brand

building, engineering and technology as we launch new products in 2016 and beyond; expected average adjusted automotive free cash flow of

approximately $6 billion to $7 billion from 2016 to 2018; expected consolidated ROIC of 20% plus; and execution of our capital allocation strategy"

 

2015 10 K

 

 

[compounding]

Why is anyone trying to value this based on EPS?  It appears to me that FCF is much lower.

 

For example, management provides an "adjusted automotive free cash flow" of 2.2B for 2015 (3.1B for 2014).  I realize that this discounts the value of the finance arm.  But, how do you want to value GM finance?  Some multiple of book?  I don't know.

the authors vari

Ultimately, I think GM represents a business that generates far less in FCF than reported GAAP net income with very limited near term growth prospects.  I don't think it is close to as "cheap" as many think (e.g. Pabrai slide deck showing >10B of FCF).

 

   

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

[loganc]

Why is anyone trying to value this based on EPS?  It appears to me that FCF is much lower.

 

For example, management provides an "adjusted automotive free cash flow" of 2.2B for 2015 (3.1B for 2014).  I realize that this discounts the value of the finance arm.  But, how do you want to value GM finance?  Some multiple of book?  I don't know.

the authors vari

Ultimately, I think GM represents a business that generates far less in FCF than reported GAAP net income with very limited near term growth prospects.  I don't think it is close to as "cheap" as many think (e.g. Pabrai slide deck showing >10B of FCF).

 

   

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

Why don't you show me your math to rectify GAAP income to Free Cash Flow for FY15?

 

 

[RadMan24]

Why is anyone trying to value this based on EPS?  It appears to me that FCF is much lower.

 

For example, management provides an "adjusted automotive free cash flow" of 2.2B for 2015 (3.1B for 2014).  I realize that this discounts the value of the finance arm.  But, how do you want to value GM finance?  Some multiple of book?  I don't know.

the authors vari

Ultimately, I think GM represents a business that generates far less in FCF than reported GAAP net income with very limited near term growth prospects.  I don't think it is close to as "cheap" as many think (e.g. Pabrai slide deck showing >10B of FCF).

 

   

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

Why don't you show me your math to rectify GAAP income to Free Cash Flow for FY15?

 

Aren't we in FY2016 now?

[gokou3]

Why is anyone trying to value this based on EPS?  It appears to me that FCF is much lower.

 

For example, management provides an "adjusted automotive free cash flow" of 2.2B for 2015 (3.1B for 2014).  I realize that this discounts the value of the finance arm.  But, how do you want to value GM finance?  Some multiple of book?  I don't know.

the authors vari

Ultimately, I think GM represents a business that generates far less in FCF than reported GAAP net income with very limited near term growth prospects.  I don't think it is close to as "cheap" as many think (e.g. Pabrai slide deck showing >10B of FCF).

 

   

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

Why don't you show me your math to rectify GAAP income to Free Cash Flow for FY15?

 

Page 23:

http://www.gm.com/content/dam/gm/mol/docs/GM-2015-Q4-Chart-Set.pdf

 

[MYDemaray]

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

I haven't done any work on this topic, but.....some possibilities:

 

- lack of confidence in one's analysis/hedging

- humility knowing one's analysis might be wrong

- operating with a thesis but not the research

[compounding]

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

I haven't done any work on this topic, but.....some possibilities:

 

- lack of confidence in one's analysis/hedging

- humility knowing one's analysis might be wrong

- operating with a thesis but not the research

 

Good answer. I agree those are possible (albeit not probable) explanations. I mean, having a variant perception is inherently a non-humble standpoint. Shouldn't the research be the basis of your thesis? Why bother forming a thesis on something you haven't done any research on, given how prone to biases and whatnot we are? You are setting yourself up for confirmation bias, commitment & consistency bias and all those other things. It's a capital mistake to theorize before you have data, as Sherlock is famous for saying.

 

Do you agree that it might be a good idea to have some sort of threshold in mind (in terms of analysis/research) that needs to be reached before forming a conclusion on any particular subject? Granted this threshold is subjective and should probably be a moving target. But still it seems like something worthwile.

[str8shot]

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

I haven't done any work on this topic, but.....some possibilities:

 

- lack of confidence in one's analysis/hedging

- humility knowing one's analysis might be wrong

- operating with a thesis but not the research

 

Good answer. I agree those are possible (albeit not probable) explanations. I mean, having a variant perception is inherently a non-humble standpoint. Shouldn't the research be the basis of your thesis? Why bother forming a thesis on something you haven't done any research on, given how prone to biases and whatnot we are? You are setting yourself up for confirmation bias, commitment & consistency bias and all those other things. It's a capital mistake to theorize before you have data, as Sherlock is famous for saying.

 

Do you agree that it might be a good idea to have some sort of threshold in mind (in terms of analysis/research) that needs to be reached before forming a conclusion on any particular subject? Granted this threshold is subjective and should probably be a moving target. But still it seems like something worthwile.

 

Interesting thread. Facts describe the past in objective terms (e.g., sales declined 10% y/y). Interpretations of past events are projections, and futuristic assumptions and recommendations are also projections. Projections are based on mental and/or intuitive models. The basis for futuristic projections may vary, but the depth of knowledge of the facts and the degree of analysis done need not correlate to how accurate the projections will ultimately be. Great analysis using an irrelevant or biased model may be worse than lesser analysis with a more appropriate model. Also a more robust model may require less data points (and analysis) so long as the most important variables can be calculated properly.

 

Two people can look at the same facts (data) and come to different conclusions. It depends on the models being used to filter the projections.

 

I don't know what compelled me to post this and perhaps the above is obvious to many. Others may disagree. I'm clearly influenced by Munger on this topic.

 

 

 

 

[Max Alpha]

 

This might be off-topic, but I'm curious.

 

Why is it that, without fail, the statement/question "I have not done any work on this"/"How do you value this?" is always followed by the author's supposed variant perception on the stock in question?

 

I haven't done any work on this topic, but.....some possibilities:

 

- lack of confidence in one's analysis/hedging

- humility knowing one's analysis might be wrong

- operating with a thesis but not the research

 

Good answer. I agree those are possible (albeit not probable) explanations. I mean, having a variant perception is inherently a non-humble standpoint. Shouldn't the research be the basis of your thesis? Why bother forming a thesis on something you haven't done any research on, given how prone to biases and whatnot we are? You are setting yourself up for confirmation bias, commitment & consistency bias and all those other things. It's a capital mistake to theorize before you have data, as Sherlock is famous for saying.

 

Do you agree that it might be a good idea to have some sort of threshold in mind (in terms of analysis/research) that needs to be reached before forming a conclusion on any particular subject? Granted this threshold is subjective and should probably be a moving target. But still it seems like something worthwile.

 

Those are the logical explanations of prefacing opinions with a disclaimer like that. That and the social hierarchy / politics that any internet community is subject to generally discourage people from taking a contrarian view (even a community like this one that should in theory be inherently contrarian). A person is more likely to do so with a built-in excuse/disclaimer to lessen the blow.

 

Having a contrasting perception has very little to do with humility. We aren't talking about someone challenging Newton's laws, for all volume traded someone is on one side of the fence and someone is on the other with an opposing view. Given the empirical evidence showing how often the herd/majority are wrong, someone isn't exactly brash/bold/arrogant for taking an opposing intellectual view in financial markets.

 

I don't think you can ascribe some sort of minimum level of research before a view becomes meaningful in an area as fickle and psychologically driven as the financial markets. The reality is one person could do a month long deep dive and still come to the wrong conclusion, whereas someone else might spend 15 minutes of their time and use their well-honed intuition to come to the right conclusion. One person's short-form analysis might be far more effective than other person's long-form/deep dive. Being approximately right versus precisely wrong etc.

 

There is undoubtedly a link between depth of research and quality of output, but the free-flow of opposing ideas is what makes this forum an excellent community. You look at a place like SeekingAlpha which has a screening process and is basically full of group-think junk.

 

 

[Steven B]

I don't want to imply that the liability is going to suddenly go supernova but I'd take a look at the logic that has been discussed by shareholders of GM.

 

==> Rates of return are currently low, they will go up over time and reduce the pension liability.  As the fed reduces easing policy you'll see rates of return go up, and so on.

 

I'd say that was probably a good bet with rates very low.  But look at where we are today.

 

1) The fed has largely stopped easing and has raised rates only 25 bps.  Where are risk free rates today?  Lower than they have almost ever been.  And that's with the fed starting to take their foot off the gas.  I thought rates were low because the fed was keeping them low?  Well here we are and rates are low because growth freaking sucks.  In fact, the less the fed tries to keep rates low the lower they will probably go.

 

2) There's like 6 trillion USD of bonds giving negative nominal rates of return.  And there is GM with a 6.5% expected rate of return on their pension assets.  Are they really going to earn 500 bps over?  When have they ever earned 500 bps over?  There's a reason why they've always had this problem despite massive capital market returns for the past thirty years.

 

Anyway I'm not a macro betting kind of guy but that's not the kind of backdrop that tells me their pension liability is going to shrink.  Maybe in accounting terms but not in real economic terms.  It's going to be nearly impossible for these massive pensions to earn 6.5% rates of return in this environment.  I think others will disagree with this and perhaps they are right.  But I'd say this is starting to get discounted into the price of the equity and something which shouldn't be ignored.  The plan is so large that a couple hundred basis point change in the expected returns can negate 30-40%* of the equity value which has already started to take place.  It's not in the 10-K's yet but it's a real cost that seems to get more real everyday.

 

It is a bit retarded that GM left bankruptcy with such a large pension shortfall.  But I guess that's the price of the government bailout.

 

* Depends on where the equity is priced and the market multiples on EBITDA these automakers trade at

 

Thanks Picasso. I'm going to dig into this further.

[Mephistopheles]

http://www.bloomberg.com/news/articles/2016-02-11/some-hedge-funds-want-to-make-subprime-auto-loans-next-big-short

 

Hedge funds trying to short auto loans

[formthirteen]

You can, too, afford a new car...

 

http://static.ow.ly/docs/g33n24a-WeSaid0216_4mIm.pdf

[fareastwarriors]

From DJCO meeting notes:

 

On General Motors: “That’s simple. GM is in the Berkshire

portfolio, because a young man who works for Warren likes

it, and Warren lets them do what they please. When he was

a young man, Warren didn't like when old men told him

what he couldn’t do. So he refrains from that with our

young men. I haven’t the faintest idea why he likes it.

Maybe it is cheap and there’ll be another god damn

government bailout. The industry is too competitive.

Everyone relies on the same suppliers, and cars last long

time with little service, and leases of cars are all at cheap

rents. This has the earmarks of a commoditized and

difficult market and will shrink one of these days. If I was

investing, I would want something way the hell better than

others, and that’s hard to find.”

 

http://www.valuewalk.com/2016/02/2016-daily-journal-corporation-meeting-munger-notes/?all=1