It has been a few years since General Motors Company (GM, Financial) resurected from the ashes of its former incarnations bankruptcy. It is still the leading automaker in the States and slowly U.S. taxpayers are forgiving the company its previous mistakes. In October 2010 the automaker integrated AmeriCredit to continue to offer credit to customers. Currently, Fiat Chrysler Automobiles CEO Sergio Marchionne is pursuing GM to merge with the Italian automaker. Sergio Marchionne has a reputation as a briliant manager who is highly skilled at creating shareholder value. His arguments are laid out in a presentation called Confessions of a Capital Junkie. His main point is that automakers are achieving RoIC below their average cost of capital. Long term that is a huge problem, and he thinks the solution lies in a few mega companies. By his estimates a combination of Fiat with another major automaker would result in between $2.8 billion to $5 billion in benefits per year. Fiat and GM’s combined Ebitda is around $19 billion, so that is signficant. GM CEO Mary Barra, meanwhile has indicated to be uninterested.
Financial strength
The financial strength of GM is definitely something you need to consider. The company has more cash than debt tied to its automaker activities, and a pension fund that is underfunded by tens of billions of dollars. At the same time its credit rating is improving steadily with the most recent upgrade (June 18, 2015) coming from Fitch Ratings who raised its credit profile to BBB-.
Management
Management is not exactly a stable factor with the new GM. It is already on its fourth CEO since its resurrection; Mary Barra, Dan Ammann has been CFO since 2011. They are relatively young people and most likely hungry to make a tremendous success out of GM. They are very well incentivized to drive the company’s ROIC above 20% which is a positive. Mary Barra has also a respectable amount of stock if you include her restricted stock which aligns her interests quite well with minority investors.
Valuation
If you examine GM's financial metrics (pictured below) the company does not immediately stand out as particularly cheap. Its Price-to-Earnings ratio is among the higher numbers, its Price to Book ratio is not standing out either although it is cheap on a Price to Sales ratio. What is very interesting is its EBITDA margin. This margin is a lot lower than its competitors and although scale plays a role in that, it suggests there is ample room for the company to improve on it.
Source: Google Finance
That view is widely shared as Reuters records an end of 2015 mean earnings estimate between analysts of $4.46 per share and end of 2016 mean earnings estimate goes up to $5.12 per share. Given that you can buy a share of GM at $36 those are attractive estimates. In the final paragraph, Outlook I will show that these analyst estimates are not crazy as GM has an attractive portfolio of cars right now. In my opinion the mean expecatation is on the low side of things. A forward earnings multiple of 10x would be more appropriate. If the market would go on to share that opinion a 22% share price increase would be imminent. Meanwhile the company is paying a sizeable dividend.
Risks
GM is dealing with an ignition recall problem which is hurting its image further and will also have an effect on financials but maybe not to the extent the market is expecting it to. Sure, it may end up having cost the company billions of dollars but currently the company can handle that. Further unexpected recalls would, of course, be very negatively surprised, and it is always a risk with automakers.
GM has been restructured to a durable core, and it is now much more resilient to downturns. The company can survive recessionary periods much more easily and makes a lot more money if the market for autos ever gets really hot again. It does have a sizeable debt load as discussed under financial strenght and an extended depression could still prove a challenge, as it would be for any automaker. The underfunded pension fund also remains a risk to some extent. It looks like its quite manageable now but when a very bad and long lasting downturn strikes it can be quite the weight on the company’s back. To most automakers, except maybe Tesla (TSLA) rising gas prices are a risk. Right now things are going smoothly for the company, but you never know when the market goes haywire.
Outlook
It is extremely hard to say what gasoline prices will do. I am actually interested in the Energy sector as it appears unduly depressed. However, if they remain low GM could continue to sell cars at the extremely high May pace. U.S. auto sales came out to an annualized 17.5 million cars. In addition GM has a number of very attractive models out. Below you can view the aggregate rankings published by U.S. News of reviews of new cars. Given its market cap, GM has a ton of models that are very highly ranked in categories that sell lots of vehicles; affordable large cars and trucks.
Source: U.S.News aggregate review rankings
Source: U.S.News aggregate review rankings
Because its models are ranked very well and it has a significant and interesting pipeline of new vehicles coming out, I expect GM will at least continue to do just fine for the foreseeable future but think there is potential for it to signficantly outperform the mean analyst expectation. In addition, management said last month that it expects to grow 6% to 8% this year in China and that Cadillac is doing very well. That is actually somewhat puzzling to me as there is a huge crackdown on corruption and ostentatious luxury going on in China. Perhaps Cadillac is benefitting because it is viewed as more modest than Mercedes or people just do not care as much about the crackdown as I thought. Weighing the pros and cons GM appears like a solid bet to outperform other automakers and the market in general over the next couple of years. I am not alone in thinking so as, among the famous value investors I keep an eye on; David Tepper (Trades, Portfolio), Kyle Bass (Trades, Portfolio), David Einhorn (Trades, Portfolio), Warren Buffett (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), Michael Price (Trades, Portfolio) and Ronald Muhlenkamp have a position in the stock.
