GM - General Motors

[cmlber]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly...  You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

[sampr01]

"A lot of people on here think "good capital allocation" means only financial engineering (Marchionne style) where you do some fancy stock split, leverage up to buy back stock, or spinoffs/other engineering".

Above statement is NOT true at so many levels and Sergio did RACE split other than that he may have cost shareholders some returns by his candid assessments. I think Europe car market is just recovering now and not a good idea sell Opel now after so many years of losses..just my 2cents.

 

Wow, engaging discussion activated.

 

1) It is the CEO's job (and that of the chairman of the board which she also holds) to serve the owners of a corporation: ie. shareholders.

 

2) Many investors seem to forget that this is a cyclical, capital intensive industry. GM is buying back stock with whatever free cash is left over (ie after capex) while maintaining $20B liquidity. Management has been crystal clear about this. Pulling out of places like Europe will decrease future capex and the liquidity requirements, fueling buybacks, but closing deals like selling Opel take time.

 

3) GM's dividend was initiated before Barra took the helm. The divi hasnt been cut lukely bc companies that cut dividends are often stigmatized for a long pd of time (see GE).

 

4) Einhorn's proposal does nothing to change the underlying value but offers the possibility of quick (but overall meaningless) bump in share price, something that a call option holder would be after, but a true long term shareholder wouldn't really care about.

 

And that's the key word here: long term mindset. Barra has been CEO for like 3 years. WEB says a true long term holder should be prepared to hold for 10 years at least. Guess it's all about your mentality (or in Einhorn's case, if you hold call options).

 

Selling Opel, developing Bolt, Cruise auto, growing earnings and buying back with free cash--that's what I look for in a CEO.

 

+1 - I agree with all the above.

 

Einhorn's preferred stock idea was already floated for AAPL and I think the actionable was very weak there and is even weaker for GM. I think GM did a great capital allocation move by getting rid of Opel, which has been a dog in terms of financial performance as long as I can remember. More buybacks would be nice for owners, but MB goal has to be to keep GM viable and I think a $20B cash buffer is not unreasonable, given that recession can drain many billion $ in cash in a single quarter. Just a reminder that GM was also FCF negative people during the last quarter.

 

A lot of people on here think "good capital allocation" means only financial engineering (Marchionne style) where you do some fancy stock split, leverage up to buy back stock, or spinoffs/other engineering. Good capital allocation in the auto biz to me means allocating capex to businesses that make good return on capital employed. That means leaving Russia, Europe, downsizing Australia, focusing on NA and China, etc. All moves that GM has made. It's like Buffett allocating capital to BNSF: a capital intensive business with high returns while jettisoning capital intensive businesses that don't earn their cost of capital (ie. like Berkshire Hathaway the textile maker).

[CorpRaider]

IIRC, Einhorn has owned shares since 2012. I can see why he is beginning to lose patience.

 

FWIW, I think Mary Barra has been a fantastic CEO, but I wish she was a little better in terms of capital allocation re buybacks. Again, IIRC, we only got increased buybacks as a result of the last roving band of activists.

 

That is correct, though some seem to be a bit blurry on that fact.  Don't favor Einhorn's plan, but am glad he's rattling the cage.  (I think this playbook is basically what he had Oil States do with spinning their lodging into a yieldco/reit).  I wouldn't really want them to cut the dividend and do buybacks because they will almost certainly buy high and stop buying when the cycle is at a nadir just like all managements do, but I hope they favor doing future capital returns via buybacks.

[tylerdurden]

 

Above statement is NOT true at so many levels and Sergio did RACE split other than that he may have cost shareholders some returns by his candid assessments. I think Europe car market is just recovering now and not a good idea sell Opel now after so many years of losses..just my 2cents.

 

If you have only 5-6% market share only and there is structural overcapacity why wouldn't you leave that market? and by the way you invested billion and billion for how many years and the company can not still break-even. How come this is a bad idea? Europe is not a very business friendly market because of regulations etc etc. Only argument could be geographical diversification but if GM knows they can't make money esp after brexit what's the point in forcing the issue?

 

[tylerdurden]

 

 

Exactly...  You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

I don't agree. You can not disregard the safety that equity provides to any company let aside a company operating in a very cyclical industry. GM's problem is not demonstrating it is cheap at the peak cycle. it is obviously cheap now;  5x earnings is cheap right? People don't know whether it will still be cheap during a downturn and whether they can manage. What's the difference your stock trades at 5x and no one cares and you buy back all that shares and it becomes 4x company and no one still gives a shit. GM does need that cushion to weather the storm when they need it. No one can predict when they will need it anyways so loading the company with debt does not sound like a good argument to me. That's why Einhorn is not suggesting that either. He is recommending some voodoo stock split. Ratings also another significant concern obviously especially for GMF.

 

[jeffmori7]

Yup, I much rather like a resilient GM to a more-leveraged GM reaching for the short-term profit.

[Dalal.Holdings]

 

Above statement is NOT true at so many levels and Sergio did RACE split other than that he may have cost shareholders some returns by his candid assessments. I think Europe car market is just recovering now and not a good idea sell Opel now after so many years of losses..just my 2cents.

 

If you have only 5-6% market share only and there is structural overcapacity why wouldn't you leave that market? and by the way you invested billion and billion for how many years and the company can not still break-even. How come this is a bad idea? Europe is not a very business friendly market because of regulations etc etc. Only argument could be geographical diversification but if GM knows they can't make money esp after brexit what's the point in forcing the issue?

 

Europe is a terrible car market when it comes to profits. 1) They don't really drive SUVs/Crossovers there as trips tend to be shorter and roads smaller and fuel costs high after taxes. 2) Regulations and union laws are much stronger than the U.S. 3) There are so many small car competitors making very similar/hard to differentiate products: VW, Fiat, Ford, Opel, Renault, PSA, etc

 

The best idea for GM is to sell Opel (a small car maker with high union/dealer footprint) and then re-enter Europe slowly and with less capital/labor deployed. Once new Cadillac lineup is complete, they can slowly enter the luxury business while watching ROIC (competing against the Germans will be tough, but doing well so far in places like China by offering a differentiated American luxury competitor), and they can also be a niche large vehicle supplier and keep the fat margins. But yeah, get rid of the razor thin margin small car business of Opel, that's a good idea.

[Spekulatius]

Opel has been a dog at least since the early 90's and possibly before that. At some point, calling it quits is the right thing to do, but apparently not easy. Yet, MB has done it and I think this is a very good move for GM.

 

On a similar note, VW should exit the US market and just keep their luxury brands Audio and Porsche. Their Volkswagen business has been making huge losses in the US off and on since the 80's...

[dyow]

I think i know what einhorn might be doing here.

 

I don't really follow Apple (or gm) but didn't Apple increase their buyback after he made his request for them to issue preferred shares?

 

He seems to be using a trick from the book influence: The Psychology of Persuasion.

 

"This trick is sometimes known as the door in the face approach. You start by throwing a really ridiculous request at someone—a request they will most likely reject. You then come back shortly thereafter and ask for something much less ridiculous—the thing you actually wanted in the first place. This trick may also sound counter-intuitive, but the idea behind it is that the person will feel bad for refusing your first request, even though it was unreasonable, so when you ask for something reasonable they will feel obliged to help out this time.

Scientists tested this principle and found that it worked extremely well as long as the same person asked for both the bigger and smaller favor, because the person feels obliged to help you the second time and not anyone else."

 

For the people who insulted einhorn, you should apoligize.  He is your intellectual superior.

[atbed]

"GM’s management team and directors have not articulated any strategy or action they believe they can take – other than waiting for the Company to survive through the next down cycle – to drive the Company’s valuation closer to its intrinsic value or to otherwise generate higher returns for shareholders."

 

-Greenlight

[Gregmal]

"GM’s management team and directors have not articulated any strategy or action they believe they can take – other than waiting for the Company to survive through the next down cycle – to drive the Company’s valuation closer to its intrinsic value or to otherwise generate higher returns for shareholders."

 

-Greenlight

 

Well, they've run the business well. They've paid a very nice dividend(some will debate the appropriateness of this vs the buyback, but whatever), and they've bought back a good chunk of stock(this again can be debated).

 

So, they've done a pretty decent job, they've been *pretty* shareholder friendly, and it's done nothing for the share price. As such, in my opinion, there should be some shake up, just to keep things fresh and honest, but no gigantic change is needed. Unfortunately in proxy fights, both sides always seem to need to be highly sensational and super polarizing.

[RadMan24]

What's wrong with buying back shares below intrinisic value? Greenlight just trying to make a quick buck. A 10-30% increase in GM's stock price makes those capital return priorities less meaningful.

[vinod1]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

It is not equity that is funding the cash.

 

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

 

Vinod

[cmlber]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

It is not equity that is funding the cash.

 

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

 

Vinod

 

Money is fungible. 

 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

 

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis. 

[vinod1]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

It is not equity that is funding the cash.

 

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

 

Vinod

 

Money is fungible. 

 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

 

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

 

No disagreement there at that level of buyback.

 

A cash level of about 6% of sales for cash drain during a recession + a couple of billion $ for cash needs at cyclical lows should be more than enough. That frees up about $7 - $8 billion that can be used to buy back stock.

 

Vinod

[Spekulatius]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

It is not equity that is funding the cash.

 

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

 

Vinod

 

Suppliers will see the debt too and probably demand quicker payment or keep Gm on a shorter leash in terms of payment terms. GM financial will find it tougher to finance itself. The gains from issuing debt will not be as large as they seem.

 

Money is fungible. 

 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

 

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

[cmlber]

Suppliers will see the debt too and probably demand quicker payment or keep Gm on a shorter leash in terms of payment terms.

 

Take (A/P - A/R)/Shipments for GM (with $12 billion in net cash) and FCAU (with $5 billion in net debt).  FCAU is 20% higher than GM.  Could be some timing randomness comparing Dec 31st, but your point doesn't appear to be true in the data.  FCAU has almost as much cash as GM, hence why suppliers wouldn't be concerned about getting paid, just has the cash financed with debt rather than equity. 

 

 

 

[Dalal.Holdings]

Bloomberg piece on GM worth reading: "At Mary Barra’s GM, It’s Profit Before All Else"

https://www.bloomberg.com/news/articles/2017-05-18/at-mary-barra-s-gm-it-s-profit-before-all-else

 

Highlights (compare what's below to GM's competitors--esp F and FCAU):

 

Barra flew to the headquarters of General Motors India with a message the team didn’t want to hear. She told Executive Vice President Stefan Jacoby, who runs the carmaker’s international businesses, that a planned $1 billion investment in India might be a bad bet....By April, Barra had a deal to sell Opel to Peugeot. She also decided not only to scrap the $1 billion investment in India but to stop selling Chevrolet models in the market altogether.

 

“We aren’t going to win by being all things to all people everywhere. It’s not the right strategy.” -Barra

 

The problem with all those markets is that profit margins either don’t exist or are nowhere near what GM wants, Ammann says.

 

When Ammann was chief financial officer from 2011 to 2014, GM installed a system to track the profits of every model in every market. In India, automakers sold almost 3 million cars last year. But GM has just a 1 percent market share, and the cars delivered very little profit, he says. “In the places where we decide to put resources, we want to win,” says Ammann. “In others we find a way to release resources or exit.”

 

despite all the talk among management gurus about the importance of maintaining beachheads in the so-called BRIC countries, meaning Brazil, Russia, India, and China. One reason: Barra just doesn’t buy the notion that selling in all the emerging markets is a requisite for success.

 

“She’s absolutely right,” says Maryann Keller, an auto analyst who has written books on GM. “Who cares about being global? The automakers have chased these victories for years, and many of them were Pyrrhic.”

 

Because of dual-class stock or concentrated shareholdings, both the Ford family that controls Ford and the Toyoda family that runs Toyota have the clout to fend off activist investors. Barra has no such defense.

 

To keep profits high, GM has pulled back from low-margin businesses including selling cars cheaply to rental fleets. Through April, GM had sold 11 percent fewer rental cars than at this time last year and trails Ford, Nissan Motor Co., and Fiat Chrysler Automobiles NV in that business, according to Keller.

 

There’s an added benefit to chopping laggard businesses, Barra says: GM’s culture was notoriously tolerant of losers, and her recent cutting of the chaff has gotten the attention of the troops. Says Barra: “It has driven accountability, because the team knows we’re serious.”

[atbed]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

It is not equity that is funding the cash.

 

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

 

Vinod

 

Money is fungible. 

 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

 

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

 

No disagreement there at that level of buyback.

 

A cash level of about 6% of sales for cash drain during a recession + a couple of billion $ for cash needs at cyclical lows should be more than enough. That frees up about $7 - $8 billion that can be used to buy back stock.

 

Vinod

 

I wish they canceled the dividend and the stock fell, allowing even cheaper shares to be bought back.

 

[fareastwarriors]

GM will cut operations in India, South Africa

 

http://www.reuters.com/article/us-gm-restructuring-idUSKCN18E0P3

[fareastwarriors]

If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

 

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

 

It is not equity that is funding the cash.

 

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

 

Vinod

 

Money is fungible. 

 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

 

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

 

No disagreement there at that level of buyback.

 

A cash level of about 6% of sales for cash drain during a recession + a couple of billion $ for cash needs at cyclical lows should be more than enough. That frees up about $7 - $8 billion that can be used to buy back stock.

 

Vinod

 

I wish they canceled the dividend and the stock fell, allowing even cheaper shares to be bought back.

 

That is simply not going to happen. I know as value investors we love buybacks at depressed valuations but we have to be realistic. Many investors like the dividend...

[vinod1]

Almost all the companies that I follow are at elevated valuations. The one exception had been GM. So I had taken a fresh look to see if it makes sense to increase my exposure but decided to hold tight.

 

I put some of my thoughts on the long term technological risks into my investment thesis on GM. It is a bit long to post on a thread so I am posting in here:

 

http://vinodp.com/blog/?p=48

 

None of it is really original and most of you are well aware of these. It only focuses on only some set of risks.

 

Vinod

[txvalue]

This new lawsuit regarding defeat devices on the Duramax diesel trucks from 11-16 does not look promising....same firm that brought suit against VW.

 

The threat of a large settlement could threaten some of their buyback dry powder. For a company just beginning to repair their image this is a big step back if true.

 

[Guest MarkS]

I also got disgusted when I saw news of the lawsuit. Sold out of my position. 

Mark

[Dalal.Holdings]

"The suit was filed by Hagens Berman Sobol Shapiro, a law firm that specializes in class actions and that previously filed a diesel-emissions suit against G.M. related to the Chevrolet Cruze compact and another against Fiat Chrysler; those suits are pending. A similar suit filed by the firm against Mercedes-Benz was dismissed. Hagens Berman has also filed liability claims unrelated to emissions against Ford Motor, Kia Motors, Tesla and others."

 

https://www.nytimes.com/2017/05/25/business/energy-environment/general-motors-diesel-emissions-lawsuit.html

 

This accusation is by a law firm that has repeatedly engaged in class action suits against auto companies. The accusation is not from the EPA nor any other regulator. Opel was cleared by European regulators not too long ago and GM in the U.S. was certainly assessed during the Obama years when VW scandal broke.

 

Frivolous lawyers looking for a quick buck in class action suit (even when plaintiffs get nothing). Hope GM does not settle and fights this. This law firm reeks of scum.