General Motors (GM, Financial) is a popular stock among many hedge fund managers, with Warren Buffett as the largest guru shareholder. According to GuruFocus data, GM makes up 1.25% of Buffett's portfolio. General Motors, which designs, builds and sell cars, trucks and automobile parts, reported its third quarter earnings on Oct. 20, with higher-than-estimated earnings in such a robust environment, but its revenue fell below the estimations of analysts. Wall Street analyst estimated revenue of $39.2 billion but GM reported $38.8 billion lower by 1%. The stock has increased by 3.02% on year-to-date basis, but underperformed as compared to Consumer Discretionary SPDR (ETF) [XLY].
Financial performace
Company overview
General Motors is a $55.67 billion market cap company. Recently the automobile company reported an EPS of $1.50 beating the consensus estimate of $1.30. GM reported net revenue of $38.8 billion as compared to last quarter of $39.3 billion. The fall in revenue is attributable to the stronger U.S. dollar. Currently GM's third-quarter revenue was $2.3 billion higher on a year-over-year basis.
GM losing its market share:
GM was considered as the leading automaker, but now the biggest automobile company position is in the hands of German-based automobile Volkswagen (VOW, Financial). Looking at General Motors’ global market share in the third quarter, GM lost its position by 0.2% as compared to the corresponding quarter of last year.
GM global share
GM lost share from all regions, but in North America GM still command a leadership position with 16.6% of the market share. Ford has the second-highest market share in same region. If we look at the other geography, GM lost highest market share in South America; its total market share for the third quarter is 14.4% as compared to 16.4% in third quarter 2014. In Europe GM lost 0.2% market share whereas it lost 0.3% share in Asia Pacific, the Middle East and Africa.
Factors drove GM third-quarter earnings
For automobile companies financial performances are key drivers. GM reported adjusted EBITDA of $3.1 billion in the third quarter; the company posted a strong adjusted EBITDA margin of 8% on a consolidated basis. Although GM lost its market share in North America, it gained a market share in the crossover and trucks segments. GM has cut down its fleet sales. Fleet sales tend to have lower profits per year in comparison to retail sales. In the third quarter GM benefited from the higher wholesale volume in North America. In addition, GM also benefited from lower raw material cost and restructuring costs.
Outlook on EBITDA:
GM expects to post an adjusted EBITDA of more than 10% in North America in fiscal year 2015. GM is targeting a margin of 9% to 10% in China through its sales of SUVs and its luxury Cadillac business.
GM liquidity and leverage:
For every automotive company having optimum liquidity and leverage, level has been a key focus area. GM ended third-quarter earnings with total liquidity of $34 billion; this includes its cash and marketable securities. GM has returned $4.6 billion to shareholders in the form of dividends ($1.7 billion) and share buybacks ($2.9 billion). The company generated strong operating cash flow of $3.3 billion in this quarter. The image below shows the cash flow trend of GM from last year's third quarter.
Outlook on liquidity and leverage:
Previously GM gave guidance on capital expenditure of $9 billion on accrual basis; however in this quarter it has given a new guidance of $8 billion. It’s all because of the timing of cash outflow. GM expects total capital expenditure to be 5% to 5.5% on an ongoing basis.
GM priorities
- The company plans to offer personalized solutions to drivers of connected vehicles.
- By the year end GM plans to offer 4G connectivity in the U.S., Europe and China.
Tax benefit from China:
The Chinese government has announced a reduction in sales tax on the purchases of smaller cars. GM expects to benefits from this tax cut.
Wall Street expectation
The stock's consensus price target is $59 with a median target of $39. Among the 18 analysts who cover General Motors, eight have assigned buy ratings, one assigned the outperform rating and nine have assigned a hold rating.
Relative valuation
The stock is currently trading at a multiple of 12.37x of EV/EBITDA basis and has a P/E ratio of 13.26x which is higher than the industry but it is still trading lower in comparison to peerlike Ford (F, Financial) which is trading at 16.98x
Hedge fund holdings
With 53 million shares Buffett is General Motors' largest shareholder among the gurus. Other guru shareholders are Brian Rogers (Trades, Portfolio), David Einhorn (Trades, Portfolio) and David Tepper (Trades, Portfolio). Below is a glimpse of Buffett's holdings in GM since the first quarter of 2012.
Note:
1) Hedge fund holdings image is taken from GuruFocus.
2) GM Global share image is created with the help of data taken from company presentation and transcripts.
3) The above images of financial performance, cash flow and global market share are taken from Marketrealistic.com
