GM - General Motors

[cmlber]

Why does it make sense for GM-FCAU merger? I never got that... They are both strong in the U.S. already and they both sell lots of trucks and SUVs....

 

VW needs FCAU more than GM since VW has weak/little presence in the U.S and lack the trucks/SUV's .... What am I not getting?

 

The commonality is the whole point.  GM & FCAU are both spending billions of dollars a year developing the exact same technology to go in very similar trucks and SUVs that have different names on them.  Sergio did a whole presentation on this.  50% of the vehicle is pretty much identical and the customer doesn't ever see it.  It makes no sense for GM & FCAU to both be developing that technology, they're throwing billions of dollars away every year. 

 

The more overlap, the more synergies. 

 

[Gregmal]

In the meantime you are getting the 5%, along with a huge margin of safety and a world class CEO.

 

What about Mary Barra do you consider world class?

 

It is my opinion that Barra did a phenomenal job handling the recall fiasco. Additionally, she has been proactive in regards to investments, such as Lyft+Cruze. She has internally promoted and encouraged innovation, and has been very shareholder friendly in terms of dividends and buybacks. The shares have not rewarded anyone, but she's doing one hell of a job. I think the re-emergence of Buick and current turnaround at Cadillac are further testament to that.

 

I'll agree on the recall.  Being proactive with investments I think is open for debate.  They needed activists to pressure the company to do the buybacks.  And my personal favorite is refusing to even talk with Fiat about a merger that would create huge value because GM is "still merging with itself."  I own the stock FYI, but I don't own it because of the CEO.

 

I've thought about the Fiat deal and am on the fence. I applaud her for focusing on GM though and not getting caught up in the circus going on at Fiat with Machionne. There probably is a deal there that benefits both companies, however GM doesn't really need it and Fiat most definitely does. Instead of letting it be a distraction, she's instead focused on improving margins, brand quality, and retail sales. All of which are currently looking better than ever.

 

"GM doesn't really need it" is horrible logic, but I think exactly what Barra has suggested.  The CEOs job is to maximize shareholder value.  What does "need" mean?  If it creates shareholder value, it creates shareholder value, that's all there is to it.  Sergio has said there could be $10 billion per year in synergies and the market cap of Fiat is $9 billion.  Even if he's way off, the synergies are so significant relative to the purchase price that you have to be a total idiot to not at least spend a few days engaging in conversation.  If after talks the price is too high then that's a legit excuse, but saying a 100 year old company is "busy merging with ourselves" is just plain dumb.

 

Putting the synergies aside, a "world class CEO" would be able to think a couple steps ahead and realize that a 15 million car / year producer would be at such a competitive advantage that other OEMs would have to start looking for deals to stay competitive.  It could create a wave of consolidations that makes the auto OEMs look like the airlines, much more consolidated and rational which could lead to higher multiples on substantially higher earnings.

 

"Need" meaning one party, at this point in time, FCA, is clearly desperate, whereas GM, after decades of incompetence is finally on the right track, so I am not going to fault them for focusing on getting their ship running as optimally as possible before taking on what would in any event be, a massive project.

[CorpRaider]

Yeah, not a fan of the massive transformative deal with great promise of synergies.  More buybacks pls.

[cmlber]

"Need" meaning one party, at this point in time, FCA, is clearly desperate, whereas GM, after decades of incompetence is finally on the right track, so I am not going to fault them for focusing on getting their ship running as optimally as possible before taking on what would in any event be, a massive project.

 

Sure, Fiat would "need" a deal more if we went into a severe downturn, but they aren't desperate.

 

Sure, it would be a massive project, but isn't the reason these people get paid to work?  With $10 billion a year in synergies you can hire plenty of help to smooth the process.  Some of the integration and synergies would be very easy.  They'd save billions of dollars a year just firing half the people working on engine/transmission R&D.

 

Just saying a world class CEO (like Sergio Marchionne) would engage in conversation and not say they are busy merging with themselves.

[hyten1]

i think barra did the right thing.

 

- gm is on track to save over 5bil by "merging with itself"

- gm wasn't exactly in the best of shape, its better to get your house in order before tackling some external unknown

- the market could of had a downturn

- $10 bil in synergies, maybe maybe not

 

i don't blame sergio, if i were him i would do the same. the "multiple" benefits for FCA are clear, but for GM not so clear.

 

i don't think barra ever said "never", she said its "better" to work on what she has been doing than deal with FCA base on their own internal study/analysis, and base on what i know i agree.

 

hy

[Gregmal]

Yeah, not a fan of the massive transformative deal with great promise of synergies.  More buybacks pls.

 

Unless you've swallowed the hook cast out from Sergio's sales pitch, there isn't a whole lot of definite evidence substantiating this being a "massive transformative deal with great promise of synergies". This 10B in synergies number is also straight out of Sergios pitch and has been broken down and disputed as being largely optimistic by many. It isn't as though GM's Board never looked at anything, like some here are incorrectly asserting. It is that the company did not think it was in it's best interest at the time, which is something as an investor I can live with. God forbid a company exercise caution or restraint.

 

I'm not saying the deal was/is bad. I agree it has a lot of potential. But the no brainer narrative presented here is hilarious. FCA is a hodge podge of second rate brands with an unhealthy amount of leverage and largely outdated technology. Sure, they're making TONS of money right now just like every other automaker. Sure they are undervalued, but so is every automaker outside of some peripheral companies. Improvements in Europe and the Jeep brand are probably the only real selling points for GM. Considering how much of a sure thing everyone thinks FCAU is, and especially considering how desperate Machionne is for a deal, its funny that no one has bothered to join Sergio at the table.

[Spekulatius]

In the meantime you are getting the 5%, along with a huge margin of safety and a world class CEO.

 

What about Mary Barra do you consider world class?

 

It is my opinion that Barra did a phenomenal job handling the recall fiasco. Additionally, she has been proactive in regards to investments, such as Lyft+Cruze. She has internally promoted and encouraged innovation, and has been very shareholder friendly in terms of dividends and buybacks. The shares have not rewarded anyone, but she's doing one hell of a job. I think the re-emergence of Buick and current turnaround at Cadillac are further testament to that.

 

I'll agree on the recall.  Being proactive with investments I think is open for debate.  They needed activists to pressure the company to do the buybacks.  And my personal favorite is refusing to even talk with Fiat about a merger that would create huge value because GM is "still merging with itself."  I own the stock FYI, but I don't own it because of the CEO.

 

I've thought about the Fiat deal and am on the fence. I applaud her for focusing on GM though and not getting caught up in the circus going on at Fiat with Machionne. There probably is a deal there that benefits both companies, however GM doesn't really need it and Fiat most definitely does. Instead of letting it be a distraction, she's instead focused on improving margins, brand quality, and retail sales. All of which are currently looking better than ever.

 

"GM doesn't really need it" is horrible logic, but I think exactly what Barra has suggested.  The CEOs job is to maximize shareholder value.  What does "need" mean?  If it creates shareholder value, it creates shareholder value, that's all there is to it.  Sergio has said there could be $10 billion per year in synergies and the market cap of Fiat is $9 billion.  Even if he's way off, the synergies are so significant relative to the purchase price that you have to be a total idiot to not at least spend a few days engaging in conversation.  If after talks the price is too high then that's a legit excuse, but saying a 100 year old company is "busy merging with ourselves" is just plain dumb.

 

Putting the synergies aside, a "world class CEO" would be able to think a couple steps ahead and realize that a 15 million car / year producer would be at such a competitive advantage that other OEMs would have to start looking for deals to stay competitive.  It could create a wave of consolidations that makes the auto OEMs look like the airlines, much more consolidated and rational which could lead to higher multiples on substantially higher earnings.

 

Synergy numbers are always questionable, especially outlandishly high numbers like a $10B number that Sergio is throwing out. GM is large enough - a merger would raise substantial antitrust issues in the US, as well as political slashback, so I am not sure it is time spent for management to go through that exercise. I'd rather have them concentrate on running the ongoing business, which is enough to do.

 

As far as VW is concerned, they better forget about a merger in the near term, fix their issues and the probably should forget about the US market as well. They are strong in many markets all over the world and have enough scale as is.

[fareastwarriors]

Thanks for the insights everyone.

 

 

I think there are still too many car markers out there. More to need to go bankrupt and disappear or merge out of existence.

[Nnejad]

Just throwing in my two cents, but merging with FCAU would have been a disaster.

[Gregmal]

Just throwing in my two cents, but merging with FCAU would have been a disaster.

 

Personally, as I've said, I'm pretty neutral to it. I can see both sides of the argument though. However mainly what I've seen is a lot of FCA shareholders somewhat bitter they didn't get a life raft.

[PLynchJr]

Why would FCA shareholders be bitter?  They've made a lot of money over the last several years.  GM shareholders can't say the same thing.  :P

[cmlber]

Why would FCA shareholders be bitter?  They've made a lot of money over the last several years.  GM shareholders can't say the same thing.  :P

 

Ya, that doesn't make any sense.  I'm bitter as a GM shareholder.  Very happy with my FCAU investment results. 

[Gregmal]

Why would FCA shareholders be bitter?  They've made a lot of money over the last several years.  GM shareholders can't say the same thing.  :P

 

Ya, that doesn't make any sense.  I'm bitter as a GM shareholder.  Very happy with my FCAU investment results.

 

Outside of being denied short term profits with GM, there is absolutely nothing to be bitter about if you are a long term investor with a value oriented approach. Frustrated that its been a bit of a dog, sure. No argument. Operationally this has a very bright and long runway, in pretty much any scenario. The same can not be said about other companies. One being FCA. Otherwise, why is Mr. Machionne so desperate to find a partner? Are you trying to tell me that under a stress test scenario FCA fares anywhere close to as well as GM? That is my point. I am thrilled with what GM is doing and the stigma of old GM will eventually disappear. The primary point regarding a merger of the two, is that FCA benefits a heck of a lot more than GM, and as a GM shareholder, I am quite alright if they focus their attention elsewhere, rather than get caught up in buying Mr. Machionne's sales pitch.

[Gregmal]

In the meantime you are getting the 5%, along with a huge margin of safety and a world class CEO.

 

What about Mary Barra do you consider world class?

 

It is my opinion that Barra did a phenomenal job handling the recall fiasco. Additionally, she has been proactive in regards to investments, such as Lyft+Cruze. She has internally promoted and encouraged innovation, and has been very shareholder friendly in terms of dividends and buybacks. The shares have not rewarded anyone, but she's doing one hell of a job. I think the re-emergence of Buick and current turnaround at Cadillac are further testament to that.

 

I'll agree on the recall.  Being proactive with investments I think is open for debate.  They needed activists to pressure the company to do the buybacks.  And my personal favorite is refusing to even talk with Fiat about a merger that would create huge value because GM is "still merging with itself."  I own the stock FYI, but I don't own it because of the CEO.

 

I've thought about the Fiat deal and am on the fence. I applaud her for focusing on GM though and not getting caught up in the circus going on at Fiat with Machionne. There probably is a deal there that benefits both companies, however GM doesn't really need it and Fiat most definitely does. Instead of letting it be a distraction, she's instead focused on improving margins, brand quality, and retail sales. All of which are currently looking better than ever.

 

"GM doesn't really need it" is horrible logic, but I think exactly what Barra has suggested.  The CEOs job is to maximize shareholder value.  What does "need" mean?  If it creates shareholder value, it creates shareholder value, that's all there is to it.  Sergio has said there could be $10 billion per year in synergies and the market cap of Fiat is $9 billion.  Even if he's way off, the synergies are so significant relative to the purchase price that you have to be a total idiot to not at least spend a few days engaging in conversation.  If after talks the price is too high then that's a legit excuse, but saying a 100 year old company is "busy merging with ourselves" is just plain dumb.

 

Putting the synergies aside, a "world class CEO" would be able to think a couple steps ahead and realize that a 15 million car / year producer would be at such a competitive advantage that other OEMs would have to start looking for deals to stay competitive.  It could create a wave of consolidations that makes the auto OEMs look like the airlines, much more consolidated and rational which could lead to higher multiples on substantially higher earnings.

 

Synergy numbers are always questionable, especially outlandishly high numbers like a $10B number that Sergio is throwing out. GM is large enough - a merger would raise substantial antitrust issues in the US, as well as political slashback, so I am not sure it is time spent for management to go through that exercise. I'd rather have them concentrate on running the ongoing business, which is enough to do.

 

As far as VW is concerned, they better forget about a merger in the near term, fix their issues and the probably should forget about the US market as well. They are strong in many markets all over the world and have enough scale as is.

 

Exactly. Not only would it undoubtedly raise antitrust concerns, but do you really think the UAW is going to sit by a green light billions of dollars in job cuts? The armchair analyst work is laughable. Especially considering that most of it is straight out of Sergio's sales pitch. FCA carries an entirely different risk profile than GM does. So considering GM is a company with a long and storied history of gunslinger acquisitions that didn't quite work out as hoped, taking a pass here was completely acceptable and if anything, commendable.

[DTEJD1997]

hey all:

 

I find it laughable that GM and Chrysler are two companies that are too small to get any scale or efficiency.  Are you kidding me?

 

Chrysler has 121BB in sales.  I sure hope they can grow!  I am sure they are being taken to the cleaners on buying supplies!

 

When oh when will they get out of the startup phase?

 

Instead of efficiency, perhaps what is in short supply is management skill/competence? 

 

Same thing with GM.

 

I have some CRAZY stories to tell about GM dealerships & product...

 

Maybe this is why they are trading for a P/E of 4....

[tombgrt]

Potential for better margins should be a reason for higher valuation, not lower? Operating cash flows are what they are but if there is room for improvement it should get reflected in the valuation as it's a potential catalyst.

[tombgrt]

Call me naive, uninformed, etc, etc, etc since I probably am on GM. 

 

That said, here I go....the problem with GM is that they don't seem to produce much free cash flow.  All of their cash flow from operations gets plowed back into the business and it doesn't seem like a business where the ROIC is that high (this is where I could be wrong).  That's what I think every time I check into the GM board on here. 

 

Ok, now everyone can either ignore me on this one, or tell me how wrong my perspective is. 

 

This. It's the same in the Fiat topic where people focus on the very low PE-multiple. Look at the complete cash flow picture including all liabilities and it is less attractive. I'm not saying these names aren't cheap, idk, but at least throw P/E out of your rationale. On a FCF basis it's probably still cheap however but given the cyclicality you get another variable to guess right.

 

Different look. Capex has been high to catch up with the underinvestment in the 2006-2010 years. This will pan off in 2019, near the time B warrants expire. Automotive cash flow has been near $12.5 billion. Pension comes out of operating cash flow, dampening that number to $10 billion, making it seem like FCF is not as high. The Pension costs are funded with debt, with 15+ year bonds. That liability is manageable and has higher rates on its side. Cash taxes are much lower than expensed, due to DTAs. Liabilities for ignition switch, Korean wages, and Takata airbags, along with Brexit costs are more than accounted for with GMs liquidity, and product lineup to continue strong sales. Revenues have continued to increase due to higher margins and retail sales volume, people are buying more Chevys and GMCs today than in years and the Chinese are buying Buicks hands over fist. 

 

It will probably take a recession for people to realize that having $20 billion in cash on the balance sheet was enough to survive a downturn. $20 billion is safe enough for Berkshire Hathaway, is it not safe number for GM as well? I never hear anyone discuss if reserving $20 billion in cash is a high enough margin of safety, with a security yielding 5% in a super low interest rate environment.

 

Good points BTshine, thank you! I'll have a deeper look at it.

 

 

Anyone here preferring the warrants over the common stock as they have a low strike price and dividends are deducted in the coming years? Still 30+ months to go before expiration.

[johnpane]

Anyone here preferring the warrants over the common stock as they have a low strike price and dividends are deducted in the coming years? Still 30+ months to go before expiration.

 

The warrants do NOT have dividend protection.

 

[Spekulatius]

Potential for better margins should be a reason for higher valuation, not lower? Operating cash flows are what they are but if there is room for improvement it should get reflected in the valuation as it's a potential catalyst.

 

I personally never rely on multiple expansion for my investment thesis. An investment should work out without any multiple expansion at all from my point of view, although I love getting a higher valuation of course.

[tombgrt]

Anyone here preferring the warrants over the common stock as they have a low strike price and dividends are deducted in the coming years? Still 30+ months to go before expiration.

 

The warrants do NOT have dividend protection.

 

 

Weird. Thought I read that somewhere. Maybe it was for one of the banks.

 

Potential for better margins should be a reason for higher valuation, not lower? Operating cash flows are what they are but if there is room for improvement it should get reflected in the valuation as it's a potential catalyst.

 

I personally never rely on multiple expansion for my investment thesis. An investment should work out without any multiple expansion at all from my point of view, although I love getting a higher valuation of course.

 

I wouldn't either but analysts probably would. Keynes' beauty contest and all that...

 

But I can understand the reasoning for both viewpoints. Shitty dealerships and crappy products might turn off potential investors just like value investing is 'too dirty' for many.

 

 

[Dalal.Holdings]

Find it hilarious that investors take Marchionne at his word so many times ($10B is laughable and there are many portfolio graveyards filled with cautionary tales about "synergies"). Marchionne's reliance on figures like EBITDA should be a red flag enough for serious investors (ask Munger or Buffett what they think about EBITDA esp for capital intensive businesses like auto). Mary Barra >>> Marchionne. GM >>> FCAU.

 

All the evidence shows Fiat makes second and third rate products. GM's products are improving and commanding substantially higher margins than FCAU can hope (ie. Buick became the first U.S. brand to make the Consumer Reports' top 3 ever, all Fiat brands rank at the bottom. JD Power echoes pretty much the same opinion):

http://www.bloomberg.com/news/articles/2016-10-24/buick-becomes-first-u-s-brand-to-crack-consumer-reports-top-3

http://www.jdpower.com/press-releases/2016-us-vehicle-dependability-study-vds

http://www.consumerreports.org/hybrids-evs/2017-chevrolet-bolt-ev-first-drive-review/

 

"Four of Fiat Chrysler Automobiles NV’s brands -- Dodge, Chrysler, Fiat and Ram -- were at the bottom of the list. The company’s Jeep line rose four places to 23rd, but remained among the “less reliable” brands."

 

One of a real reasons Marchionne is desperate for GM is likely the ratcheting CAFE standards which GM has invested billions in (Volt/Bolt, diesel, boosting car portfolio, improving overall economy of fleet, etc). Meanwhile, FCAU has made almost no investments in such areas and now wants to focus more and more on large vehicles/SUVs/Trucks. This is praised as somehow a brilliant strategy by Marchionne, yet not only would CAFE standards blow FCAU up, but so would a spike in oil prices. If you want to see how this plays out, go read up on the history of GM in the 2000-2008 period.

 

As far as pricing, GM appears to be much more disciplined with incentives and fleet sales than FCAU. GM also has better relations with UAW than FCAU. FCAU also has a potential massive black swan risk with diesel cheating in Europe which Opel (GM's brand) was recently cleared of (http://www.autoblog.com/2016/09/01/germany-fiat-chrysler-cheat-diesel-emissions/). GM also appears more adept at dealing with regulators/recalls (esp after recent crisis) than Fiat.

 

Fiat is unlikely to survive a serious downturn, a spike in oil prices, or a rising of CAFE/fuel efficiency standards. GM is likely to continue maintaining profitability through all of these. FCAU is laden with multiple black swan risks.

 

All these and more reasons make it puzzling why investors on a "value investing board" would praise FCAU or Marchionne.

[tombgrt]

Hi Dalal. Great post and I agree with what you are saying (as far as I can, as my knowledge is limited). Do you have any idea how a sensitivity analysis on oil prices would work for the sector and specific companies? Could you provide some numbers or a link to get me started? TIA.

[RadMan24]

Find it hilarious that investors take Marchionne at his word so many times ($10B is laughable and there are many portfolio graveyards filled with cautionary tales about "synergies"). Marchionne's reliance on figures like EBITDA should be a red flag enough for serious investors (ask Munger or Buffett what they think about EBITDA esp for capital intensive businesses like auto). Mary Barra >>> Marchionne. GM >>> FCAU.

 

All the evidence shows Fiat makes second and third rate products. GM's products are improving and commanding substantially higher margins than FCAU can hope (ie. Buick became the first U.S. brand to make the Consumer Reports' top 3 ever, all Fiat brands rank at the bottom. JD Power echoes pretty much the same opinion):

http://www.bloomberg.com/news/articles/2016-10-24/buick-becomes-first-u-s-brand-to-crack-consumer-reports-top-3

http://www.jdpower.com/press-releases/2016-us-vehicle-dependability-study-vds

http://www.consumerreports.org/hybrids-evs/2017-chevrolet-bolt-ev-first-drive-review/

 

"Four of Fiat Chrysler Automobiles NV’s brands -- Dodge, Chrysler, Fiat and Ram -- were at the bottom of the list. The company’s Jeep line rose four places to 23rd, but remained among the “less reliable” brands."

 

One of a real reasons Marchionne is desperate for GM is likely the ratcheting CAFE standards which GM has invested billions in (Volt/Bolt, diesel, boosting car portfolio, improving overall economy of fleet, etc). Meanwhile, FCAU has made almost no investments in such areas and now wants to focus more and more on large vehicles/SUVs/Trucks. This is praised as somehow a brilliant strategy by Marchionne, yet not only would CAFE standards blow FCAU up, but so would a spike in oil prices. If you want to see how this plays out, go read up on the history of GM in the 2000-2008 period.

 

As far as pricing, GM appears to be much more disciplined with incentives and fleet sales than FCAU. GM also has better relations with UAW than FCAU. FCAU also has a potential massive black swan risk with diesel cheating in Europe which Opel (GM's brand) was recently cleared of (http://www.autoblog.com/2016/09/01/germany-fiat-chrysler-cheat-diesel-emissions/). GM also appears more adept at dealing with regulators/recalls (esp after recent crisis) than Fiat.

 

Fiat is unlikely to survive a serious downturn, a spike in oil prices, or a rising of CAFE/fuel efficiency standards. GM is likely to continue maintaining profitability through all of these. FCAU is laden with multiple black swan risks.

 

All these and more reasons make it puzzling why investors on a "value investing board" would praise FCAU or Marchionne.

 

There is a FCAU board. Lot of opinions and it can go both ways. Let's not discredit how Marchionne promised 1 million Jeep sales and analysts just laughed at him and he delivered. Consumer reports always rates SUVs low reliability, nothing new. There is a case to be made for combination, even Munger has said all three would have to combine to have a shot in the future. Munger is still anti-GM in terms of an investment. Electric Chinese autos are not even here yet and would present quite a challenge. But, as others have mentioned, the proposed combination is not moving forward.

 

I also encourage you to read Machionne's Confessions of a Capital Junkie. 

[Dalal.Holdings]

"Confessions of a Capital Junkie" is right. He is nothing but an LBO financier playing an auto CEO.

 

Auto is a notoriously difficult business when it comes to capital returns. Being bigger might not be better. Being a niche provider of certain vehicles (ie. luxury) might be the best way to achieve adequate capital returns. So in fact, being smaller -- ie not making cars for everyone everywhere -- might be the best way to proceed.

 

GM merging with an inferior auto business makes no sense. The best thing may be for FCAU to go under during the next downturn/oil price spike/regulatory ratcheting/diesel scandal/large recall so that GM is left standing. After that, GM and Ford and whoever else is left can pick up the viable pieces of FCAU (? Jeep) at fire sale prices -- how's that for "value creation"? The weak are the ones who die in cyclicals and FCAU is an obvious weakling.

 

If you want to see what happens to the fate of those who buy Chrysler, go ask Daimler how consolidation worked out. Go ask Cerberus Capital Management how a leveraged EBITDA strategy worked out. Seems no one has made Chrysler work out and now Marchionne is in the same boat.

 

I will always endorse a CEO who is focused on making superior products over financial transactions as vastly better. Hence Barra >>> Marchionne.

[cmlber]

I will always endorse a CEO who is focused on making superior products over financial transactions as vastly better. Hence Barra >>> Marchionne.

 

Under Barra, GM has compounded at a staggering negative 8% for 3 years. 

 

Today (and throughout her tenure) she shows her clear owner orientation and conviction in her abilities and GM's future prospects by owning a whopping $4 million of common equity, 10 months of cash compensation.

 

Under Marchionne, three different public companies (combining his tenure at each) have compounded at 20%+ for 18 years.  He has ~$100 million invested in the company.

 

It's one thing to like GM stock, it's another to be so biased in your analysis that you can definitively say Barra >>> Marchionne. 

 

If Marchionne was in Barras shoes, do you think GM would have inferior product?  That's essentially what you are saying.