GM - General Motors

[Shooter MacGavin]

Vinod,

 

Thanks for posting.  I only see additional paid-in-capital of $46M for the exercise of warrants on their consolidated statement of equity.  That means at the most, at least the way I understand it, at $10 strike, at most only 4.6M warrants could have been exercised. (or less if you assume there were some class B in there)  But we're trying to reconcile 95M warrants (165M at 12/31/2014 and 70M at 12/31/2015).  So maybe I'm missing something here. 

 

45.5M of the class C expired out of the money on 12/31/2015.

 

so still missing 45M I think.  (165 - 70 - 45.5 - 4.6 ) = 45M

 

at the end of the day, I care about the diluted share count I guess.

[vinod1]

Vinod,

 

Thanks for posting.  I only see additional paid-in-capital of $46M for the exercise of warrants on their consolidated statement of equity.  That means at the most, at least the way I understand it, at $10 strike, at most only 4.6M warrants could have been exercised. (or less if you assume there were some class B in there)  But we're trying to reconcile 95M warrants (165M at 12/31/2014 and 70M at 12/31/2015).  So maybe I'm missing something here. 

 

45.5M of the class C expired out of the money on 12/31/2015.

 

so still missing 45M I think.  (165 - 70 - 45.5 - 4.6 ) = 45M

 

at the end of the day, I care about the diluted share count I guess.

 

I am not able to match up the additional paid in capital as well and that is why I had the question to investor relations. It still does not add up, but I am assuming it might have to do with cash less exercise but still there would be a gap.

 

The ones expiring in 12/31/2015 are never part of the calculation as they are out of the money anyway. 10-K makes it clear.

 

The only ones that are being counted are the 272 million warrants ($10 and $18.33 strike). Many might have opted for cashless exercise and if they were are a sufficiently low price, then the actual number of stock issued would be low. Though using reasonable numbers with stock price in the $30 range, the numbers do not add up at first glance.

 

For example, if stock is at $25 and $18.33 warrants are exercised, they would be worth $6.67 so only 0.27 shares need to be issued per warrant ($6.67/$25). In this case just issuing 36 million shares would eliminate the entire bunch of136 million $18.33 warrants.

 

Thanks

 

Vinod

 

 

[Shooter MacGavin]

ah got it.  Ok.  thanks for clearing that up.  I'd never heard nor thought of the cashless exercise.  It makes sense though.  Effectively analogous to the company going out and repurchasing stock with the exercise proceeds (Treasury Stock Method). 

 

 

[scorpioncapital]

The Hottest Metric in Finance: ROIC

http://www.wsj.com/articles/the-hottest-metric-in-finance-roic-1462267809

 

Call me skeptical, but how in the world is a car maker earning over 25% ROIC? This would make it the greatest business in the world. I'm thinking either this is a temporary (few years) event or something was written off?

[Shooter MacGavin]

1) It is partly because GM stretches the trade.  It's payables are out to 70 something days during the first quarter. GM's vendors are more than financing its inventory (by > $10B during as of 1Q16), which raises its ROIC measure by ~4%. 

 

2) Also the ROIC is kind of goofy because it is counting Net income from JV's in the numerator, and the equity portion of JVs in the denominator. 

 

3) Again GM is counting the GM Financial profit portion in EBIT and GM's portion of its equity in the equity account...which i guess is ok since the parent doesn't bear the risk for it. And then of course they're not subtracting out taxes.

 

That they can force suppliers to finance them for 70 days on a rotating basis is, I guess, a good thing because it is costless financing, but their ROIC is not a super "high quality" measure of return on capital, in my view. 

 

On after-tax invested AUTOMOTIVE-only assets (ex JVs and excess cash and DTAs), by my math, GM is earning around 11-12% percent excluding the JV's.  Which is not too bad, if you're trying to assess the quality of GM's operations compared to other industries and other auto OEMs.  I think its comparable or higher than BMW, Mercedes, Ford, maybe even Toyota. 

 

However, all that being said, i think the absolute ROIC number by itself in this case is not too useful anyway since GM is returning most of its earnings. What's important is that GM's measuring stick is consistent, and you should see the ROIC go up higher, because they're touting all these efficiencies yet to come.  In other words, more or less squeezing more profit from the same capital base. (they say that and then they go and spend $1.5B on cruise automation ....)

 

[rsmehta]

Anyone see the monthly sales report,

 

    Looks like they are having a hard time with ramping up production of the Cadillac XT5 and CT6.

 

---------------------------------------------------------

 

    Disappointing

[RadMan24]

Retails sales were very strong for Chevy. Cadillac is in transition, but progress will be made.

 

GM's ROIC is a little out there, but the company does have the JV on the books at around $8 billion and $30 billion in DTAs.

 

If GM receives $2 billion a year from its China JVs, is that really a concern? People have taken aim at the metric, but it's not like its the only one GM focuses on.

 

Malibu sales are strong, new Cruze looks like a hit. Midsize trucks selling very well. GM is doing a lot of things right.

[Nnejad]

Helps shed some light on the Cadillac sales this month:

https://www.gm.com/mol/m-2016-may-0504-cadillac-sales.html

 

[merkhet]

Some comments by Einhorn today @ Ira Sohn - http://blogs.marketwatch.com/thetell/2016/05/04/live-blog-top-stock-picks-from-the-sohn-hedge-fund-conference/#entry_70

 

Einhorn turns his attention to General Motors.

 

GM bears think ride sharing will hurt car sales, but he thinks that’s skewed by living in big-city skyscrapers, he says. People in the financial industry don’t appreciate the fact that consumers outside urban areas aren’t going to wait around for an Uber.

 

He expects China to maintain China market share and improve margins and has reorganized its European presence. Too bad Europe’s car market isn’t in great shape right now, he says.

 

But if the market swings up, GM is in good shape.

 

Overall, Einhorn thinks normalized mid-cycle earnings should be near 2015 levels. GM has a good record on buybacks, he says, and should be able to continue to shrink its share count. “There’s magic to a 6 PE and a big buyback,” he says.

[nikhil25]

GM, Lyft to Test Self-Driving Electric Taxis

Move aimed at fighting off Silicon Valley giants amid a reshaping auto industry

http://www.wsj.com/articles/gm-lyft-to-test-self-driving-electric-taxis-1462460094

 

Details of the autonomous-taxi testing program are still being worked out, according to a Lyft executive, but it will include customers in a yet-to-be disclosed city. Customers will have the opportunity to opt in or out of the pilot when hailing a Lyft car from the company’s mobile app.

 

In addition to driverless cars, GM aims to use Lyft and its growing army of drivers as a primary customer for the Bolt, an electric car that launches later this year amid soft demand for electric vehicles. The Detroit auto giant and Lyft currently rent the Chevy Equinox to drivers needing vehicles in Chicago, but that program will expand to more cities and will rely heavily on Bolts in the future instead of the sport-utility vehicle.

[merkhet]

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/fiat/msg264423/#msg264423

[merkhet]

http://blogs.barrons.com/stockstowatchtoday/2016/05/11/general-motors-can-the-stock-hit-50/

 

If we were constructing a US automotive equity portfolio, we believe there is greater risk in being UW, given the possibility of strategic alternatives facing the company with a high degree of sensitivity to the underlying equity, triggering our upgrade to EW.

 

Gotta love that sell-side speak.

[CorpRaider]

The poor young man who wrote that drivel probably enrolled in an ivy league school 6 years ago and planned to major in epic poetry.  Wall street is truly evil.  hehe.  Then again maybe he's from Detroit.  ;D

[Homestead31]

i'm interested in learning more about GM's financial arm.

 

If you have read any good articles, reports, etc or have any strong opinions on the business, please post any links or thoughts here.

 

thanks!

[Shooter MacGavin]

I'm going to be going from memory a lot here but...

 

They report to bond holders separately.  You can find a lot of info at the link below.  Importantly, GM Parent doesn't guarantee the credit of issued bonds (important from the point of view of GM equity holders, especially those who fear an imminent subprime lending auto crisis).  However, GM Parent does have a revolver available to GM Financial, presumably to alleviate any liquidity issues should credit markets ever freeze up again.  I forget the size but I think its substantial.

 

https://www.gmfinancial.com/investors-information/events-and-presentation.aspx

 

the FDIC gives you data on historic delinquency and charge-offs rates.  I believe auto loans fall under consumer "other"...but you'll have to double check this.  You can see that the delinquency rates weren't  horrible during the crisis. and unlike for mortgages, auto APR's have generally covered the cost of default/charge-offs. I believe GM Financial's predecessor company was profitable through the crisis save for one or two quarters.

 

https://www.federalreserve.gov/releases/chargeoff/delallsa.htm

 

Here is an other interesting article talking to weaker auto lending standards generally

 

https://www.fdic.gov/regulations/examinations/supervisory/insights/sisum05/article04_auto_lending.html

 

You can have a bubble in real estate through subprime lending.......but its unlikely that you have a bubble in used autos.  Said differently, its not likely that the loan to values will be on hugely inflated values for autos, like they were for real estate.  in other words, don't let the subprime label scare you necessarily.  I believe GM financial's loans are well priced for this segment of the market.  Mostly, the bond holders are taking the risk on this anyway. 

 

Last point, GM financial is in the business to make a profit, but it's really there to support GM Parent strategically.  This is different from consumer banks that want to do auto lending because the net interest spreads are higher.  The latter is more likely to make lower quality loans.

 

hope that helps

[Shooter MacGavin]

also consider that some meaningful part of GM financial is dealer floorplan financing, i want to say ~10%......these loans are fully collateralized by brand new vehicles ..I think Steve Rattner talked about this in his book Overhaul...these loans are virtually risk free because if the dealer defaults, then they just move brand new vehicles back into their inventory for resale.

[Homestead31]

great stuff to get me started shooter.  thanks very much

[Foreign Tuffett]

 

I guess at some point you have to trust management's discretion on this type of issues. If you don't believe that Mary Barra and Chuck Stevens would act in the best interest of the shareholders with the available facts to them any point in time, you shouldn't be investing in GM anyways...

 

Trust is not a black and white issue; one does not have to blindly trust management to make the best decisions even if one believes they are acting in what they believe to be the best interest of the shareholders.  One should evaluate and re-evaluate investments as new developments occur.  One does not have to like all decisions even if in aggregate one is comfortable with (or at least willing to accept) management.  Everyone makes mistakes, even those you trust.

 

For my part, I am in the camp that is highly skeptical of this use of company cash & stock.

 

FWIW, I'm in GM more than Fiat at this point.  However, I think Sergio is a much better capital allocator.  Barra and co seem to be ok operators, but I have very little trust in their capital allocation.  I'm glad the activists got them to do buybacks instead of dividends, so that has gotten better.  But this VC stuff... Just no.

 

I was reading back through the last several pages of this thread and Racemize's comment above caught my eye as encapsulating my feelings about GM.

 

Autonomous driving features will be quickly commoditized regardless of which automaker takes the initial lead. Also, government regulation is likely to veer towards the conservative, so the technology will probably run ahead of the ability to fully put it in the hands of the car buying public.

 

At the end of the day GM is a OEM automaker, not a "mobility company" or whatever other buzzword one wants to use. I suspect that Maven, the Lyft investment, and the Cruise Automation acquisition aren't likely to payoff.

[Shooter MacGavin]

does anyone know if GM uses LIFO or FIFO for automotive COGS? 

 

I can't seem to find it in their 10-ks.  I'm actually surprised that this wouldn't be disclosed.

 

It just occurred to me that since material costs are 2/3rds of Auto COGS, this potentially may be significant to margins, and their ROIC calc's.

 

Anyone know if they've talked to the net tailwind they've gotten from commodity deflation over the last few years?  I don't remember anyone asking the question on earnings calls.

[vinod1]

does anyone know if GM uses LIFO or FIFO for automotive COGS? 

 

I can't seem to find it in their 10-ks.  I'm actually surprised that this wouldn't be disclosed.

 

It just occurred to me that since material costs are 2/3rds of Auto COGS, this potentially may be significant to margins, and their ROIC calc's.

 

Anyone know if they've talked to the net tailwind they've gotten from commodity deflation over the last few years?  I don't remember anyone asking the question on earnings calls.

 

They turnover their inventory like about 10 times in a year. So not really material at all. So you are talking about 40 days or so inventory cycle. Unless we are in a super high inflation or deflation, the effect is going to be un-measurable.

 

Vinod

[Shooter MacGavin]

Vinod,

 

Really good point! thanks.

[AJB96]

GM management expects earnings at GM Financial to more than double by 2018. Earnings are currently $800m / year at GM Financial. Doubling earnings would be pretty meaningful for the bottom line.

 

http://gmauthority.com/blog/2016/06/general-motors-looks-to-double-gm-financial-earnings/

 

In the presentation attached GM management expects GM Financial earnings to more than double by 2018 (page 109).

 

Alex

Global_business_update_conference_call.pdf

[RadMan24]

does anyone know if GM uses LIFO or FIFO for automotive COGS? 

 

I can't seem to find it in their 10-ks.  I'm actually surprised that this wouldn't be disclosed.

 

It just occurred to me that since material costs are 2/3rds of Auto COGS, this potentially may be significant to margins, and their ROIC calc's.

 

Anyone know if they've talked to the net tailwind they've gotten from commodity deflation over the last few years?  I don't remember anyone asking the question on earnings calls.

 

Expect steel, aluminum, lithium, zinc, and even oil prices to increase from here, rather than explorate current costs over the next few years. But that doesn't mean they turn into a headwind anytime soon...

 

Edit: Forgot, to find out the big picture look at 5 year financial result tear sheet in the 10K. Also, on website, check this out, dig deeper if needed, but very helpful in identifying helpful tidbits. http://www.gm.com/content/dam/gm/events/docs/5195903-584988-Chartset-6-25-2015.pdf

 

 

[hyten1]

folks quick question what are the tax implication of GM warrants?

 

if you exercise GM warrants (in a cashless transaction) how are the tax applied? is it the same as a call option?

 

would you have to pay the gain when you sell the warrant to buy the stock? or does it get defered?

 

thanks

 

EDIT: I have not decided to exercise or not just want to know how it works

[Shooter MacGavin]

not 100% sure about the tax implications.  If you're a US investor, I imagine they're just like options.  If you exercise and hold, you will defer taxes until you sell the stock.  if you sell the warrants you will pay a gain / loss based on your cost basis. 

 

Question for the board on the GM Warrants class B:

 

Upon expiration if the stock is still in the toilet say at the $28 level, and you still believe the market is severely undervaluing the stock (let's say you thought it was $70-$80 at expiration). what is the best strategy?  It seems to me that at low stock prices, you're better off exercising and holding.  If the stock is below strike, great, take the loss on the warrants and buy some stock.  It seems that taking the net exercise of shares is a bad idea at these prices but a good idea at higher prices, vs. just exercising the warrants.

 

Anyone other holders of the class b think about strategy on the warrants here as we get closer to expiration and the warrants continue to get crushed in the market?  when does it make sense to do one vs. the other?  (this exercise necessarily assumes the GM thesis itself isn't impaired, just that the stock itself is not reflecting the right price).