A Look Into Morgan Stanley's Upgrade of General Motors

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May 31, 2015
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Morgan Stanley analyst Adam Jonas recently upgraded General Motors (

GM, Financial), saying that the company may consider radical strategic changes going forward as share buy backs are not working. In his latest report he wrote:

"We see a wide range of potential strategic options that GM could pursue as it tries to best position the enterprise for the challenges and opportunities that lie ahead in the quickly evolving automotive/transportation landscape. Each has its own set of risks, opportunities, and range of outcomes. As an example, under the scenario in which GM pursues a mega-deal with a large automaker, we can envision a bull case of $90 supported by significant cost savings in excess of $1bn/annum yielding 500 bps of margin improvement. However, we would note that we are not in a position to assign any level of likelihood to these scenarios."

Other sell-side analysts are also positive on the company’s prospects. Citigroup (C) recently added General Motors to its focus list and reiterated its buy rating on the company. According to analysts, investors are missing some important catalysts that can likely help General Motors' stock price. In particular, he talked about margin expansion potential from 2016 and 2017 product cycles, accelerated European sales recovery, exit from loss making Russian operations and tailwinds from lower raw material prices.

In addition to positive sell side commentary, GM is also seeing a good amount of buying by insiders and fund managers. In the last couple of months, three different insiders have purchased General Motors’ stock. While the company’s directors Patricia F Russo and Linda R Gooden purchased 1,500 and 1,000 shares, respectively in April 2015; another director James J Mulva purchased 28,343 shares in May 2015.

General Motors' stock is also seeing significant interest from fund managers of late. Last quarter,

David Einhorn (Trades, Portfolio) and Leon Cooperman (Trades, Portfolio) initiated a position in the company while several other fund managers including George Soros (Trades, Portfolio), David Tepper (Trades, Portfolio), Ken Heebner (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) increased their holdings in the company.

General Motors is under a turnaround, and its business is improving. It has now been profitable for 21 consecutive quarters. Last quarter, GM's business delivered strong core operating performance with almost all key operating metrics including global deliveries, net income and adjusted EBIT improving.

For FY2015, management is expecting adjusted EBIT and adjusted EBIT margins to improve in all automotive regions. For FY2016, the company's target is to reach 10% adjusted EBIT margins in North America, profitability in Europe and maintaining strong net margins in China.

The company is passing benefit of this strong performance to its shareholders and intends to raise its common stock dividend 20% to $0.36 per share from second quarter of the current year. This is over and above $5 billion in buy-backs announced earlier this month. At current valuations, the announced buybacks will reduce GM's share count by 8.2%.

General Motors is trading at 8.22 times FY2015 EPS. The company has an attractive dividend yield of 3.20%. Out of 19 analysts covering the company, 11 are positive and have buy recommendations, six have hold ratings and two have sell ratings. The company's improving performance is attracting attention of insiders, sell-side analysts and some of the most successful fund managers. I believe General Motors offers a good value at the current levels.

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