Does GM make for an intelligent speculation?
Since it is backed by the U.S. government, let's do a rough estimation. Starting with a base estimate of annual free cash flow at a value of approximately $3.3 billion and the number of shares outstanding at 1.57 billion shares, we used an assumed free cash flow annual growth of 6 percent for the first 10 years and assume zero growth from years 11 to 15. Review the free cash flow record here:
http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=GM&stocktab=keyratio
The resulting estimated intrinsic value per share (discounted back to the present) is approximately $29.34.
Market Price = $21.94
Intrinsic Value = $29.34 (estimated)
Price To Value (P/V) ratio = .75 and the estimated bargain = 25. percent.
Before we make a purchase, we must decide (filter No. 1) if GM is a high quality business with good economics. Does GM have (filter No. 2) enduring competitive advantages, and does GM have (filter No. 3) honest and able management?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is GM the best place to invest our money today? I do not think so. However, since Mr. Combs' and Mr. Weschler's compensation is based on three-year performance, I think this was a bet made by one of them and approved by Mr. Buffett.
I can see GM doing well for the next three to four years as a restructured entity. I do not yet see any long-term competitive advantages at GM.
Bud Labitan
author of "The Four Filters Invention of Warren Buffett & Charlie Munger" and "Moats"
Since it is backed by the U.S. government, let's do a rough estimation. Starting with a base estimate of annual free cash flow at a value of approximately $3.3 billion and the number of shares outstanding at 1.57 billion shares, we used an assumed free cash flow annual growth of 6 percent for the first 10 years and assume zero growth from years 11 to 15. Review the free cash flow record here:
http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=GM&stocktab=keyratio
The resulting estimated intrinsic value per share (discounted back to the present) is approximately $29.34.
Market Price = $21.94
Intrinsic Value = $29.34 (estimated)
Price To Value (P/V) ratio = .75 and the estimated bargain = 25. percent.
Before we make a purchase, we must decide (filter No. 1) if GM is a high quality business with good economics. Does GM have (filter No. 2) enduring competitive advantages, and does GM have (filter No. 3) honest and able management?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is GM the best place to invest our money today? I do not think so. However, since Mr. Combs' and Mr. Weschler's compensation is based on three-year performance, I think this was a bet made by one of them and approved by Mr. Buffett.
I can see GM doing well for the next three to four years as a restructured entity. I do not yet see any long-term competitive advantages at GM.
Bud Labitan
author of "The Four Filters Invention of Warren Buffett & Charlie Munger" and "Moats"
