The total return enjoyed by shareholders tends to be driven by earnings. On a short-term basis the market value of a company can go anywhere, but in the long run it is the earnings that can’t be ignored any longer.
General Motors (GM, Financial) trades at 3x operating cash flow. In around three-to-four years it will have generated operating cash flow equal to its current market cap. General Motors also trades at 5.6x earnings and 5.3x EV/EBITDA.
There is $57 billion in long-term debt but also $23 billion in debt and short-term securities to offset that.
Guru David Einhorn (Trades, Portfolio) has ramped up his General Motors position very seriously to 27% of the U.S. stock portfolio -- this after General Motors has already been a major position for several years.
The company did dismiss Einhorn’s proposal for a dual share class structure earlier this year but do not expect that to be the last you hear about it. Einhorn stated the following in his Q1 2017 letter:
"We know this is a tough fight. Fortunately, the math is on our side (if GM does what we suggest, we believe the stock will go up a lot) and the ultimate decision will be made by our fellow shareholders. We believe others recognize that the stock is deeply undervalued and when shareholders grasp the math and the extent of GM’s behavior, they will vote with their wallets and for needed change at the Board level."
Combined with the awfully low valuation awarded by the market and the ramping up of the position, I don’t believe for a second this fight is done.
Conclusion
If you believe automakers should be valued per the amount of Twitter followers of their respective CEOs, Tesla makes a lot of sense. If you believe earnings drive shareholder returns you will gravitate towards General Motors. I am in the earnings camp, and it is rare to find companies with flexible balance sheets trading at 3x operating cash flow and 5.3x EV/EBITDA.
Disclosure: no position
