If there is one thing most people know about Warren Buffett, it is that he is not a fan of automobile manufacturing companies. Nevertheless, the investment guru holds a major position of 40 million shares in General Motors Co. (GM, Financial). So why did Buffett make an exception and invest such large sums of money in the auto maker? A value investment seems to be the obvious answer. And, with share prices skyrocketing over the past year, it comes as little surprise that the founder of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) is bullish regarding General Motors.
Emerging Market May Be the Key
Despite being a U.S.-based firm, General Motors is looking increasingly to emerging markets for future sales. Brazil, China and India are experiencing rising demand, which the automaker is looking to take advantage of. In order to do so, the firm has announced plans to expand its network of dealership, while increasing production.
A new $1.3 billion plant in China for example, which will bring General Motors’ total assembly plants in the Asian nation to 14, will be dedicated to the manufacture of Cadillacs. Through this strategy, the automaker intends to capture part of the luxury vehicle market, which is currently dominated by European firms.
Regaining Its Foothold
Since the financial crisis of 2008, General Motors has been partially owned by the U.S. government, which kept many potential investors away from the stock. However, the firm is now reversing this trend, by repurchasing the shares it had to sell in order to remain afloat. This is a strong signal to shareholders, that the company is once again strong and growing. Also, the repurchase of shares has boosted General Motors’ earnings per share, since outstanding shares were reduced by around 11%.
Growing U.S. Market
Another positive sign is the $8 billion annual investment plan the company has put in place, which will see the firm’s North American plants receive a $1.5 billion cash injection throughout 2013. New vehicle development is the target of these investments, as General Motors seeks to upgrade around 70 percent of its lineup this year. The automaker will thus be looking to gain additional market share with new models, and hopefully increase vehicle pricing. According to General Motors, a 10% rise in profit margins should be achieved over the next few years.
The investments in the North America region will surely prove beneficial, as the U.S. auto industry continues to boom. In a recent article I had mentioned how this would benefit Ford Motor Co. (F, Financial), yet General Motors should also see revenue climb as the industry experiences sector wide growth.
Looking Further Forward
If there is one thing General Motors isn’t missing, it’s cash reserves. The Detroit-based automaker has amassed around $27 billion, and will likely begin returning capital to shareholders next year, by offering a dividend rate for the first time since 2008. Also, the stock is currently trading at 12.9 times its trailing earnings, meaning investors can follow in Warren Buffett’s footstep and acquire shares at a 16% price discount relative to the industry average. Considering General Motors’ growth potential, and cheap price from a valuation standpoint, this stock represents a great investment opportunity going into 2014.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
