Renowned value investor David Einhorn (Trades, Portfolio) was reportedly buying up more General Motors (GM, Financial) shares, including calls, as of recent filing.
According to GuruFocus data, Einhorn’s hedge fund – Greenlight Capital (GLRE, Financial) –Â held GM-Call shares amounting to 25 million or 14.97% of all assets management by the hedge fund as of December. As observed, Greenlight also had reduced its stake in equity shares by 22.5% or 7.9% of total assets management.
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"While the bears have been screaming 'peak auto' for the last couple of years, we think a strengthening job market will sustain the current upcycle and lead to better than expected credit performance at GM's finance subsidiary. While the bears also cite long-term concerns over self-driving cars, we see a huge intermediate-term opportunity in assisted-driving cars. In any other industry, investors would be enthused by the developing upgrade cycle, which could last for a number of years as incremental improvements in each model year attract consumers.
"GM's valuation is extreme: at its year-end price of $34.84 per share, GM trades at less than 6x earnings. It is rare for a company to pay out only a quarter of its profits in dividends and still yield 4.4%. GM has substantial foreign operations that (other than China) barely contribute to profits and could improve over time. Finally, we believe that GM can unlock substantial value through modest changes to its capital structure."Â –Â David Einhorn on General Motors (Business Insider)
Valuations review
General Motors is indeed undervalued compared to its peers. According to GuruFocus data, the Detroit-based car maker had trailing price-earnings (P/E) ratio of 5.8 times vs. industry median of 18 times, price-book (P/B) value of 1.2 times vs. industry median of 1.7 times and price-sales (P/S) ratio of 0.33 times vs. 0.8 times in industry median.
General Motors also had trailing dividend yield of 4.4% with a 25% payout ratio.
In average fiscal 2017 estimates, General Motors would have forward P/S and P/E ratios of 0.32 times and 5.7 times.
Total return
General Motors had failed to outperform the broader Standard & Poor's 500 index in both the short and long term. According to Morningstar data, the car company delivered 0.29% total return so far this year compared to S&P 500’s 5.2%. Meanwhile, General Motors had provided 9.2% vs. S&P 500’s 13.3% in the past five years.
Earnings performance
The $52 billion carmaker delivered its fiscal 2016 results in February. General Motors recorded 9.2% sales growth to $166.4 billion in 2016 but delivered 2.68% lower profits to $9.43 billion compared to 2015.
In review, General Motors would have still delivered a solid and impressive near 60% profit growth if the company did not record hefty, $3.7 billion changes in valuation allowances in its Europe operations back in 2015.
“By almost any measure, 2016 was a great year for our business and I am confident we can achieve even stronger results. We’ll work to build on our momentum while continuing to drive our company to innovate and shape the future of mobility.” – Mary Barra, chairman and CEO
General Motors shares reacted with 0.11% gain upon market close post-earnings announcement.
Outlook
General Motors expects to deliver higher revenues in full-year 2017 along with an earnings per share diluted and diluted-adjusted of $6.00 to $6.50 compared to 2016’s $6 and $6.12.
The company also expects to generate about $15 billion in automotive operating cash flow and about $6 billion in adjusted automotive free cash flow. These measures, according to the company, do not consider potential future adjustments.
In addition, General Motors also expects its global volume from new or refreshed vehicles to grow to 38% from 2017-2020, up from 26% in the 2011-2016 period.
General Motors
General Motors was founded Sept. 16, 1908. The Detroit-based car company designs, builds and sells cars, trucks, crossovers and automobile parts worldwide. Further, General Motors provides automotive financing services through General Motors Financial Company Inc.
In 2016, General Motors generated 71% or $118.3 billion of its sales including GM Financial operations, from the U.S.
General Motors has five segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO) and GM South America (GMSA) and GM Financial.
(2014 and 2016 10-K Filings)
GM North America
In 2016, sales in North America grew by 11.6% to an impressive $119 billion or 72% of total sales having excluded corporate eliminations and adjustments.
In 2016, the division delivered an earnings before interest and taxes (EBIT) margin of 10.1% vs. 10.3% in 2015.
(2014 and 2016 10-K Filings)
GM Europe
In 2016, GM Europe sales fell flat and generated 11% or $18.7 billion of total company sales. The division delivered an EBIT loss of $257 million in 2016 compared to $813 million losses in 2015.
(2014 and 2016 10-K Filings)
GM International Operations
In 2016, GM International Operations sales fell by 6.9% to $11.75 billion or 7% of total sales and delivered a lower EBIT margin of 9.7% compared to 11.1% in 2015.
(2014 and 2016 10-K Filings)
GM South America
GM South America sales fell by 7.6% in 2016 to $7.22 billion or 4% of total sales and delivered losses before taxes and interests of $374 million compared to losses of $622 million in 2015.
(2014 and 2016 10-K Filings)
GM Financial
GM Financial sales have grown impressively in recent years. In 2016, the division gathered 48% sales growth to $9.56 billion or 6% of total sales – having surpassed GM South America operations this year. Also, GM Financial recorded an EBIT margin of 9.6% in 2016 compared to 13% in 2015.
(2014 and 2016 10-K Filings)
Cash, debt and book value
As of December, General Motors had $24.8 billion in cash and cash equivalents including marketable securities, and $84.6 billion in debt with debt-equity ratio of 1.92 times vs. 1.57 times in 2015.
Of $221.7 billion assets 2.8% were labeled as goodwill and intangibles. General Motors also had a book value of $44 billion compared to $40.3 billion in 2015.
Pensions
(2014 and 2016 10-K Filings)
Cash flow
(10-K)
In 2016, cash flow from operations grew 41.5% to $16.55 billion. As observed, General Motors had a good amount of cash inflow coming in from its provisions for deferred tax and marked reduction in cash outflow in changes in other operating assets and liabilities.
Capital expenditures including purchases of leased vehicles were $9.54 billion leaving General Motors with free cash (out)flow of $12.62 billion compared to free cash flow losses of $11.34 billion in 2015.
Absent the $15.2 billion and $19.6 billion leased vehicles purchase in fiscal 2015 and 2016, General Motors would have recorded positive free cash flow figures of $3.8 billion and $7 billion.
(2014 and 2016 10-K Filings)
Obviously, General Motors paid more to its shareholders through dividends and share repurchases despite having poor free cash flow performance brought by leased vehicle purchases.
The car maker has also been actively purchasing available-for-sale marketable securities and other companies with having allocated $15.2 billion in 2016.
(2014 and 2016 10-K Filings)
General Motors seemed to gathered ‘a bit’ more debt proceeds in fiscal 2016 with $22 billion – after repayments.
Conclusion
Certainly, General Motors is trading at a good discount compared to peers.
Investors would find the company certainly attractive when having added in its juicy dividend yields and a couple of billion more in buyback activities in the mix.
Meanwhile, General Motors seemed to has taken in more debt recently and has delivered poor free cash flow performance when cash outflow allocated to leased car purchases were included.
(General Motors Share Price and Price-Sales Ratio, GuruFocus)
Average of 20 analysts had a median target of $39.75, a 15% appreciation from today’s share price of $34.56.
Taking General Motors’ three-year price-sales multiples average and growth and asking a 20% margin –Â leaving shares outstanding unchanged –Â would give a value of $33 a share.
In summary, General Motors is a buy with $37 a share value.
Disclosure: I do not have shares in any of the companies mentioned.
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