GM - General Motors

[sleepydragon]

https://www.cadillac.com/content/dam/cadillac/na/us/english/index/world-of-cadillac/super-cruise/super-cruise-updates011519/02-pdfs/Consumer_Reports_Article.pdf

 

Cadillac’s auto pilot system is really good!

[RadMan24]

"SAARs may fall off a cliff" & "They're not doing enough buybacks" should not be in the same sentence.

[Ahab]

For what it's worth, I think the mental model of a lot of investors for a SAAR downturn is a 2008-level swoon in auto sales that utterly obliterates auto stocks and leads to many bankruptcies. This has played a significant part in auto stocks treading water in a raging bull market. If GM can weather this downturn in the cycle well, the stock should do really well from its currently low valuation IMO (especially when you throw in the Cruise Auto kicker which may shift market perception of the parent). There is a fine line between buybacks that would leave such a cyclical company leveraged to the hilt and buybacks that would reasonably reward shareholders without imperiling the balance sheet. I suspect we are far below the optimal level of buybacks and the stock has languished in part as a result.

[JRM]

GM has bought back 15% of its shares since I've owned it; they should have bought back 25%.  My original investment thesis was spot on, yet the share price didn't respond accordingly.  Sometimes you're right but it doesn't matter and it's time to move on.

[Ahab]

That's a fair point JRM. Sometimes Mr. Market is generous and other times Mr. Market is stingy, with GM it has been the latter of late. I'm considering building a position through LEAPS, but I sympathize with your view that this trade is taking far too long.

 

^Interesting interview of Steve Eisman, in which he talks about GM for several minutes and discusses the potential for the stock to re-rate, in part due to its cheap valuation and in larger part because of improving market perceptions of Cruise Automation.

 

[Spekulatius]

GM has bought back 15% of its shares since I've owned it; they should have bought back 25%.  My original investment thesis was spot on, yet the share price didn't respond accordingly.  Sometimes you're right but it doesn't matter and it's time to move on.

 

While in most sectors, the multiples have expanded, there are a few sectors, where multiples have compressed. Automobiles, auto suppliers, natural resources, energy, commercial real estate are sectors where multiples have compressed. Sometimes, it is not the managements fault.

 

Mr Market likes to hear stories right now and sometimes ignores solid cash flow. Maybe the above are value traps, but as long as cash is coming it, the jury is still out, imo.

[ander]

My view on in it is that intrinsic value has continued to increase but the share price has lagged substantially. Re: the gap closing, share buybacks would help, but it is one of those things as previous posters have highlighted that there is a recency bias (people remember the nightmare from 2008 and the historical industry structure). Typically with these types of situations, they re-rate unexpected (maybe following a recession where GM weathers the storm well, or FCF continues to keep grinding higher, or share buybacks are done in size, etc.). I'm still holding my position and looking to likely increase position size on further weakness.

[JRM]

Like I said, now is probably the time to buy since I hedged my position.  I'm optimistic on GM, but I'm having a hard time seeing the market re-rate GM before the next SAAR downturn.  I don't even think it takes a SAAR downturn, just a slow down of truck and SUV sales.  They won't continue to sell $50,000 trucks at the same rate forever. The low interest rate environment has pulled forward demand and allowed people who otherwise couldn't afford a $50k truck/SUV to be able to finance one. 

 

I agree GM is financially more sound now than when I originally invested, but it looks to me like there are also more ways to lose now. 

[Guest ajc]

 

Before folks on here get too bullish on GM or the auto sector, I suggest going as far back as you can on Daniel Ruiz's Twitter feed (https://twitter.com/DRuizG80) and reading what he's written.

He's been more right about auto stocks over the past five years than anyone else I'm aware of, and right now he's sending up multiple warning flares.

Even if you end up disagreeing completely, it's worth it for the contrarian take.

I say this as someone who did well in FCAU over the past few years (though I'm out now), so I've got no bone to pick.

 

 

 

[ander]

ajc - I went to his website and read several posts. Thanks for flagging. The crux of his negative view seems to be that truck / suv sales might have gone up for a number of reasons but good chance that public sentiment switches back to cars just as the auto manufacturers are all starting to shift to truck / suv (i.e., at the wrong time). Is that correct?

 

 

 

Before folks on here get too bullish on GM or the auto sector, I suggest going as far back as you can on Daniel Ruiz's Twitter feed (https://twitter.com/DRuizG80) and reading what he's written.

He's been more right about auto stocks over the past five years than anyone else I'm aware of, and right now he's sending up multiple warning flares.

Even if you end up disagreeing completely, it's worth it for the contrarian take.

I say this as someone who did well in FCAU over the past few years (though I'm out now), so I've got no bone to pick.

 

 

 

[sleepydragon]

ajc - I went to his website and read several posts. Thanks for flagging. The crux of his negative view seems to be that truck / suv sales might have gone up for a number of reasons but good chance that public sentiment switches back to cars just as the auto manufacturers are all starting to shift to truck / suv (i.e., at the wrong time). Is that correct?

 

 

 

Before folks on here get too bullish on GM or the auto sector, I suggest going as far back as you can on Daniel Ruiz's Twitter feed (https://twitter.com/DRuizG80) and reading what he's written.

He's been more right about auto stocks over the past five years than anyone else I'm aware of, and right now he's sending up multiple warning flares.

Even if you end up disagreeing completely, it's worth it for the contrarian take.

I say this as someone who did well in FCAU over the past few years (though I'm out now), so I've got no bone to pick.

 

 

 

 

That the winter is coming for car industry is basically the prominent view right now. It’s not new, unique insights.  That’s why the entire industry PE is so low.

[Pondside47]

ajc - I went to his website and read several posts. Thanks for flagging. The crux of his negative view seems to be that truck / suv sales might have gone up for a number of reasons but good chance that public sentiment switches back to cars just as the auto manufacturers are all starting to shift to truck / suv (i.e., at the wrong time). Is that correct?

 

 

 

Before folks on here get too bullish on GM or the auto sector, I suggest going as far back as you can on Daniel Ruiz's Twitter feed (https://twitter.com/DRuizG80) and reading what he's written.

He's been more right about auto stocks over the past five years than anyone else I'm aware of, and right now he's sending up multiple warning flares.

Even if you end up disagreeing completely, it's worth it for the contrarian take.

I say this as someone who did well in FCAU over the past few years (though I'm out now), so I've got no bone to pick.

 

 

 

 

I read a few pages of his report and felt he jumped to conclusion abruptly. He showed a few graphs of car sale/truck sale vs oil price and claimed there is a weak correlation between the two over time, without giving statistics. My take on the graphs he showed is that there's weak correlation except for the point where oil price gets really high. It was obvious from the graphs he showed that truck sale decreased when oil price hit new peak.

 

Then he said because there is a weak correlation, current low oil price doesn't guarantee consumer won't switch back to cars. Though he didn't talk about why people would switch back to cars. And then his conclusion is US auto OEMs are screwed especially FCA because of the reliance on trucks...

 

 

[Guest ajc]

 

 

ajc - I went to his website and read several posts. Thanks for flagging. The crux of his negative view seems to be that truck / suv sales might have gone up for a number of reasons but good chance that public sentiment switches back to cars just as the auto manufacturers are all starting to shift to truck / suv (i.e., at the wrong time). Is that correct?

 

 

Before folks on here get too bullish on GM or the auto sector, I suggest going as far back as you can on Daniel Ruiz's Twitter feed (https://twitter.com/DRuizG80) and reading what he's written.

He's been more right about auto stocks over the past five years than anyone else I'm aware of, and right now he's sending up multiple warning flares.

Even if you end up disagreeing completely, it's worth it for the contrarian take.

I say this as someone who did well in FCAU over the past few years (though I'm out now), so I've got no bone to pick.

 

 

 

Ander, I'm no expert on the sector so please keep that in mind. I think what Ruiz is saying is the Detroit Three have bet almost their entire ranches on big, expensive trucks and SUVs and that's where they earn their profits. If something causes consumers to not be able to afford those vehicles and be forced to buy smaller and more affordable foreign cars or vehicles from the used market, then GM, F, and FCAU will see their profit centers hit really hard.

 

The issue with that is there are a record number of Americans with car leases ending in 2019 and I believe Ruiz is saying that residual values already look bad, consumer credit strength has deteriorated, and auto loan defaults are rising.

This video he did from 2017 explains the process far better than I can - https://www.youtube.com/watch?v=PwoHxIvqXIk.

 

Basically, my understanding is there are so many cars coming off lease that used car prices are going to be depressed. That means the residual value of those cars won't be enough for already stretched American buyers to trade them in and buy expensive trucks or SUVs with, which is what GM, F, and FCAU badly need them to do.

Instead, those buyers will only be able to afford to buy cheaper foreign sedans or used vehicles. I think this is why he's saying the falling truck sales number is so important and why the US manufacturers zigged wrongly while the foreign ones zagged correctly.

 

I think this article about what Edmunds is saying around residual values is worth reading too - https://www.aftermarketnews.com/edmunds-record-number-of-americans-with-car-leases-ending-in-2019-will-face-significant-price-hikes/.

Again this isn't an area of expertise for me, but my understanding is that all the metrics he outlined in that video are now at record highs and not in a good way.

 

 

 

[Guest ajc]

 

Recent long interview with Daniel Ruiz about why he's bearish on GM, FCAU, & F, together with a graph of US auto loan delinquency rates below.

Feel free to ignore the vast majority of DiMartino-Booth's macro opinions.

 

 

 

[Spekulatius]

AJC - the above Interview is well worth listening too. I believe they Daniel Ruiz is onto something. one thing they should be noted is they since the US car industry has become an US truck industry, it is essentially protected by a 25% import tax (chicken tax). I believe this tax has a lot to do with the higher profit margins in this sector (the other fact is that trucks are just way more popular in the US than anywhere else), so a trade deal could cause considerable lower profit margins in the long run ironically.

[JRM]

AJC - the above Interview is well worth listening too. I believe they Daniel Ruiz is onto something. one thing they should be noted is they since the US car industry has become an US truck industry, it is essentially protected by a 25% import tax (chicken tax). I believe this tax has a lot to do with the higher profit margins in this sector (the other fact is that trucks are just way more popular in the US than anywhere else), so a trade deal could cause considerable lower profit margins in the long run ironically.

 

This was true historically.  However, foreign manufacturers build their trucks in the U.S. with mostly non-union labor.  The baby boomer generation had strong allegiances to either Ford or Chevrolet; but not younger generations.  People are buying Toyota Tundras and Tacomas.  The brand allegiances are still strong, but not like they used to be.

[sleepydragon]

AJC - the above Interview is well worth listening too. I believe they Daniel Ruiz is onto something. one thing they should be noted is they since the US car industry has become an US truck industry, it is essentially protected by a 25% import tax (chicken tax). I believe this tax has a lot to do with the higher profit margins in this sector (the other fact is that trucks are just way more popular in the US than anywhere else), so a trade deal could cause considerable lower profit margins in the long run ironically.

 

This was true historically.  However, foreign manufacturers build their trucks in the U.S. with mostly non-union labor.  The baby boomer generation had strong allegiances to either Ford or Chevrolet; but not younger generations.  People are buying Toyota Tundras and Tacomas.  The brand allegiances are still strong, but not like they used to be.

 

Talibans drive Toyota trucks, and Toyota is doing nothing about it.

[SHDL]

Talibans drive Toyota trucks, and Toyota is doing nothing about it.

 

https://qz.com/519171/how-did-the-toyota-pickup-become-terrorists-favorite-truck/

[cmlber]

The baby boomer generation had strong allegiances to either Ford or Chevrolet; but not younger generations.  People are buying Toyota Tundras and Tacomas.  The brand allegiances are still strong, but not like they used to be.

 

This may be your perception, but it is not in the data.  The Detroit 3 control 92% of the full-size pick-up truck market, up from 88% a decade ago.

 

The mid-size market has been dominated by the Tacoma, but only because Ford, GM, and Chrysler had no product in this much smaller segment until very recently.

[ander]

Any thoughts on a Fiat Chrysler / Renault tie-up on auto industry? Do margins come down for the industry? Share shifts likely? More mergers likely? Or more of a non-event for industry? Recall: Sergio M. had pushed for industry consolidation for auto industry.

[JRM]

The baby boomer generation had strong allegiances to either Ford or Chevrolet; but not younger generations.  People are buying Toyota Tundras and Tacomas.  The brand allegiances are still strong, but not like they used to be.

 

This may be your perception, but it is not in the data.  The Detroit 3 control 92% of the full-size pick-up truck market, up from 88% a decade ago.

 

The mid-size market has been dominated by the Tacoma, but only because Ford, GM, and Chrysler had no product in this much smaller segment until very recently.

 

Brand allegiance is still very strong for full size pickup market.  i'm thinking it will not be as strong in the future.  We'll see.

[ander]

https://www.cnbc.com/2019/05/31/automaker-shares-plunge-after-trumps-surprise-mexico-tariffs-gm-shares-fall-5percent.html

 

DB estimates that a 25% Mexico tariff would be a $6 B EBIT hit to GM.

[LowIQinvestor]

https://www.cnbc.com/2019/05/31/automaker-shares-plunge-after-trumps-surprise-mexico-tariffs-gm-shares-fall-5percent.html

 

DB estimates that a 25% Mexico tariff would be a $6 B EBIT hit to GM.

 

25% mexico tariff Aint gonna happen.

 

At a 5 PE all these fears are more than reflected.

 

Buying long-dated GM calls today.

[ander]

https://www.cnbc.com/2019/05/31/automaker-shares-plunge-after-trumps-surprise-mexico-tariffs-gm-shares-fall-5percent.html

 

DB estimates that a 25% Mexico tariff would be a $6 B EBIT hit to GM.

 

25% mexico tariff Aint gonna happen.

 

At a 5 PE all these fears are more than reflected.

 

Buying long-dated GM calls today.

 

Same view...but that's going to be an overhang until resolved. and ultimately, if we had share buybacks right now, it would be value accretive since my estimate of fair value is substantially higher...

[Gregmal]

Mary Barra and the GM board have overtaken the fellows at CTO as championing the title Chief Asshole of the Underperformance Division of my portfolio. Only because she/they continue to be so diligent about it.