GM - General Motors

[Picasso]

My understanding is that you can exercise to defer taxes, but your one-year holding period for LTCG restarts at the time of exercise.  So if you sell six months after your exercise, the gains/losses will be short-term even though you held the warrants for years.

[johnpane]

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).

 

Closer to expiration? These expire three years from now, so I don't view this as the end game. My inclination with the warrants getting crushed is to accumulate more.

[merkhet]

My understanding is that you can exercise to defer taxes, but your one-year holding period for LTCG restarts at the time of exercise.  So if you sell six months after your exercise, the gains/losses will be short-term even though you held the warrants for years.

 

I second this understanding.

[Shooter MacGavin]

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).

 

Closer to expiration? These expire three years from now, so I don't view this as the end game. My inclination with the warrants getting crushed is to accumulate more.

 

sure.  My question isn't whether the warrants are under or overvalued today.

 

My question was - let's assume the stock is down or flat at expiration and the thesis is still intact.....what do you do?  It's entirely possible that this thesis doesn't fully play out by a repricing of the warrants alone if the market fails to recognize the value in 2019.  But that doesn't mean the investment is impaired.

 

For this hypothetical let's assume the stock is "worth"  $80 in july 2019, but trading at far less.

 

In the case of the stock trading below $18.33 in 2019.....what is the proper course of action?  in this case, you have no choice but to recognize a capital loss - however your upside is still intact if at that point you buy the stock.  when the stock eventually goes to $80 your upside is the $80/(cost of warrant + cost of stock) - 1.  (actually to be perfectly fair - your return should also include the return you received on capital you were able to employ elsewhere from choosing to buy the warrant instead of the stock but subtract the after tax dividends foregone).

 

What happens if the stock stays at the current $28 though? You can 1) either sell the warrant for $9.67 2) exercise the warrant and cough up the extra $18.33 to buy the stock or 3) choose a net exercise and receive 0.34 shares for every warrant you own. 

 

it seems to me based on my fully diluted EPS math that an exercise is the smartest thing to do that point.  However, a net exercise, the benefit of which is you don't need to cough up anymore capital, seems to be a better option the higher the stock goes.

 

at $28 -

1 is the worst decision.  2 is the best decision but requires more capital. 3 is a suboptimal decision

 

This is how I'm thinking about it.  How are others thinking about the warrants if the stock stays flat at $28 in 2019?

[johnpane]

What happens if the stock stays at the current $28 though? You can 1) either sell the warrant for $9.67 2) exercise the warrant and cough up the extra $18.33 to buy the stock or 3) choose a net exercise and receive 0.34 shares for every warrant you own. 

 

it seems to me based on my fully diluted EPS math that an exercise is the smartest thing to do that point.  However, a net exercise, the benefit of which is you don't need to cough up anymore capital, seems to be a better option the higher the stock goes.

 

at $28 -

1 is the worst decision.  2 is the best decision but requires more capital. 3 is a suboptimal decision

 

This is how I'm thinking about it.  How are others thinking about the warrants if the stock stays flat at $28 in 2019?

 

Well, I use the warrants for the leverage so I doubt I would choose (2). If I still believe the stock is undervalued, I would not choose (1) to get out completely. So, maybe (3). One option you didn't mention is to "roll" the warrants into LEAPS to continue the leveraged play.

[Shooter MacGavin]

What happens if the stock stays at the current $28 though? You can 1) either sell the warrant for $9.67 2) exercise the warrant and cough up the extra $18.33 to buy the stock or 3) choose a net exercise and receive 0.34 shares for every warrant you own. 

 

it seems to me based on my fully diluted EPS math that an exercise is the smartest thing to do that point.  However, a net exercise, the benefit of which is you don't need to cough up anymore capital, seems to be a better option the higher the stock goes.

 

at $28 -

1 is the worst decision.  2 is the best decision but requires more capital. 3 is a suboptimal decision

 

This is how I'm thinking about it.  How are others thinking about the warrants if the stock stays flat at $28 in 2019?

 

Well, I use the warrants for the leverage so I doubt I would choose (2). If I still believe the stock is undervalued, I would not choose (1) to get out completely. So, maybe (3). One option you didn't mention is to "roll" the warrants into LEAPS to continue the leveraged play.

 

That's a good point and for some reason, one that never crossed my mind.  So you could buy a $10 call option (or margin plus put) in July 2019 with the proceeds of the warrants too.  I guess you'd have to make sure you sold the warrants for extrinsic value (stock - strike) no later than a few days ahead to ensure you had liquidity, (or you'd have to exercise it and sell the stock, which is the less efficient way to do it) 

[RadMan24]

I think you have a few points - The GM warrants though do provide more potential upside and if things do go awry - you put less capital up, in part due to the obvious risk of being worthless. All in all, if you want to play through the various scenarios, maybe create an excel sheet and tables and just play around with different payout possibilities. That way, you have at least an idea what to do when the time does come to make a decision.

 

 

[Shooter MacGavin]

the bad

 

http://www.reuters.com/article/us-gm-ruling-idUSKCN0ZT1RR

 

..and the good...

 

http://www.thedetroitbureau.com/2016/07/new-gm-scores-small-court-victory/

 

 

I can't believe that the 2nd U.S. Circuit Court of Appeals won't uphold the bankruptcy court's ruling barring plaintiffs claims against New GM.  They fundamentally don't understand property rights.  Why should new shareholders continue to pay as much as we already have for the sins of a former management team, former company, former owners? 

 

This type of asinine action will only increase the premium charged by new owners in future bankruptcies and therefore reduce recoveries to DIP creditors.

[Nnejad]

For what it's worth, I felt exactly as you do at first.. allowing the claims to proceed could make sense to me now assuming that the plaintiffs still had to be prove all of the individual issues to the case. That is, that vehicle owners were damaged, old management knew, and that knowing this before bankruptcy would have led to a substantially different outcome. A lot of the claims have already been thrown out on just the first issue, and the positive of allowing this to proceed is that it keeps up a deterrent for managers trying to cover up liabilities during a bankruptcy.

 

But heck, I'm no lawyer.

[rsmehta]

earnings coming out on Thursday,

 

  anyone venture to guess:

 

EPS:

EBIT:

EBIT%:

number of shares bought-back:

 

[racemize]

Only 0.3 Billion in buybacks.  The pension ate all of it.

[Shooter MacGavin]

Only 0.3 Billion in buybacks.  The pension ate all of it.

 

that and $800M for cruise automation, some additional incremental capex and bringing the automotive company's cash target back up to $20B.  But yeah it's frustrating.

 

The "good news" is that the stock is still in the toilet even after a 40% increase in profitability.  So hopefully GM will be able to shrink sharecount meaningfully over the next few years.

 

Personally, I wish they would cut the dividend. They'd have more financial flexibility, their credit rating would go up, and they wouldn't need to hold on to so much cash.  Plus they would be able to plow more back into share repurchases at these insane prices. 

 

Anyone that wants a steady income should just sell 30% of their stock and buy bonds.  They'll get a higher yield with the same proportion of income.

 

But what do I know?

 

[Spekulatius]

$2.7B in pension contributions during the first 6 month of this year, that is a lot of money.

[TwoCitiesCapital]

$2.7B in pension contributions during the first 6 month of this year, that is a lot of money.

 

That's what happens when your underfunded and your liabilities (rates) rally significantly....

[Shooter MacGavin]

from the 10-k

 

"We also expect to make a discretionary contribution of $2.0 billion to our U.S. hourly pension plan by mid-2016 which is expected to be financed by debt. "

 

the pension contribution is an exchange of pension liabilities for debt. LT debt went up by $2.0B from the year end. 

[valueinvesting101]

$2.7B in pension contributions during the first 6 month of this year, that is a lot of money.

 

That's what happens when your underfunded and your liabilities (rates) rally significantly....

 

Won't liabilities come down with higher discount rate reducing present values of liability and increasing expected returns.

[CorpRaider]

Yesh.

[TwoCitiesCapital]

$2.7B in pension contributions during the first 6 month of this year, that is a lot of money.

 

That's what happens when your underfunded and your liabilities (rates) rally significantly....

 

Won't liabilities come down with higher discount rate reducing present values of liability and increasing expected returns.

 

Sure, but exactly the opposite happened. 10-year rates set record lows late in June....

 

Discount rates and forward looking return expectations are falling, not rising.

[rohitc99]

$2.7B in pension contributions during the first 6 month of this year, that is a lot of money.

 

That's what happens when your underfunded and your liabilities (rates) rally significantly....

 

Won't liabilities come down with higher discount rate reducing present values of liability and increasing expected returns.

 

Sure, but exactly the opposite happened. 10-year rates set record lows late in June....

 

Discount rates and forward looking return expectations are falling, not rising.

 

Wouldnt the logical response to this be to fund the pension liabilities (which could be increasing for now) via debt issuance (fixed rate if possible). In the future , if the discount rates go up, it reduces the liability gap further. Ofcourse they could drop further which means that the company needs to fill the gap further, but can refinance it with lower debt.

[merkhet]

A number of really good reviews for the Chevy Bolt recently.

 

http://www.wired.com/2016/09/chevrolet-bolt-range-epa-rating/

http://www.theverge.com/2016/9/13/12899752/chevy-bolt-driving-impressions-review

http://www.caranddriver.com/reviews/2017-chevrolet-bolt-ev-first-drive-review

[Foreign Tuffett]

Am I right to assume that the first generation Bolt will be a money loser for GM?

[compounding]

Am I right to assume that the first generation Bolt will be a money loser for GM?

 

To my knowledge, the answer would be yes (although it's hard to know for certain since no auto OEM discloses profitability by car except hints and nods). But I am also of the opinion that the contribution of this particular project shouldn't be judged by its contribution to the bottom line of the income statement.

[merkhet]

Am I right to assume that the first generation Bolt will be a money loser for GM?

 

To my knowledge, the answer would be yes (although it's hard to know for certain since no auto OEM discloses profitability by car except hints and nods). But I am also of the opinion that the contribution of this particular project shouldn't be judged by its contribution to the bottom line of the income statement.

 

Also, I think there was an article in the Journal that indicated that the Bolt allows GM to sell more SUVs because it balances out their fuel economy standards, so it will probably still add to the bottom line on account of that.

[CorpRaider]

Might sell like hotcakes.  I don't think many people thought Prius would be such a big seller.

[awindenberger]

The Bolt is looking very interesting, and it seems GM is following the Prius model a bit by making the car very practical (it will have similar amount of cargo room as Prius).