General Motors

I do no like GM cars.  When I told my wife I was considering an investment in GM, she told me I was crazy.  She does not know, but she drives a GM (Buick) that she loves.  I hate it. I pay the repair bills.  But you know what, it is a 2008 Buick, lets give a chance to the new General Motors.

Description

Company

From wikipedia…

General Motors Company,[1] commonly known as GM, is an American multinational corporation headquartered in Detroit, Michigan, that designs, manufactures, markets and distributes vehicles and vehicle parts and sells financial services. General Motors produces vehicles in 37 countries under thirteen brands: Alpheon, Chevrolet, Buick, GMC, Cadillac, Holden, HSV, Opel, Vauxhall, Wuling, Baojun, Jie Fang, UzDaewoo.[7][8] General Motors holds a 20% stake in IMM, and a 77% stake in GM Korea. It also has a number of joint-ventures, including Shanghai GM, SAIC-GM-Wuling and FAW-GM in China, GM-AvtoVAZ in Russia, Ghandhara Industries in Pakistan, GM Uzbekistan, General Motors India, General Motors Egypt, and Isuzu Truck South Africa. General Motors employs 212,000 people and does business in more than 120 countries.[2] General Motors is divided into five business segments: GM North America(GMNA), Opel Group, GM International Operations (GMIO), GM South America (GMSA), and GM Financial.[9]:12, 13 As part of its 2009 bankruptcy restructuring the current company, General Motors Company LLC, (“new GM”), was formed in 2009, after the bankruptcy of the General Motors Corporation (“old GM”). The new company purchased the majority of the assets of “old GM”, including the name “General Motors”.

Management

CEO

GM current CEO is Mari Barra. She has been named at that role January 15th of last year (2015).  She is at GM’s head for less than one year and worked at GM for all her life.  Starting has a co-op student in engineering she climed the ladders one at a time for the past 26 years (she started in 1980).  You have to respect that.  Her history has a CEO is short but great.

From Forbes…

Since taking control of GM, she faced revelations about faulty ignition switches blamed for at least 74 deaths and 126 injuries, a 30-million car recall and pressure from investors to return more cash to shareholders. In October the 35-year GM veteran finally got to lay out her strategy for the future, which includes turning Cadillac into a global luxury brand, continuing to grow in China and becoming a technology leader. Under Barra GM is also proving to be more disciplined financially, making tough decisions like pulling out of Russia, Australia and Indonesia or killing the Chevrolet brand in Europe if there’s not enough profit to justify continued investment.

Compensation

Total executive compensation came in at over 51 millions in 2015, Mary Barra having most of it at 15 millions.  That is alot of money.  Most of the compensation is in stock.  On 5.4billions of net income it is a small percentage of the total profit (0.2%).

Shareholders

The governement of the United States have exited the ownership of GM (acquired from the restructuring).  The current owners are institutions including the value oriented Vanguard Group (5,12%) and Berkshire Hataway (3.12%).  Total institutions ownership is around 40%.

Financials

Overall Ratios

  • Market cap is around 46B for a 5.5B in net income resulting in a P/E of 12.  If you think about it, 2015 had an extra 2.2B charge related to the ignition switch.  Adding back this 2.2B charge and considering no improvement in operating cost / flat sales, you get 7.7B in forward net income.  This would give us a FP/E close to 6!
  • Return on equity around 12% is not an outstanding result but in the car industry it is considered good return considering the debt load.  Ford with 4 times more debt ROE ratio is at 17%.
  • GM’S ROIC (return on invested capital) is close to 5.5%.  In this low interest environnement, it is acceptable but I would prefer GM to return money to the investors because we should be able to invest our capital at an higher rate.
  • Dividend yields is around 4.6% and looks easy to maintain with a payout ratio around 30%.

Balance sheet

  • The company is using debt at a ratio debt/equity close to 1.2  It is a reasonnable ratio considering that current income covers 17 times the interest payments.  If you compare to Ford, GM debt is irrelevant.  Ford ratio stands close to 5!
  • Book value per share stands at 22$.

Revenues

  • Automobile industry is a cycle industry.  When to many new cars are sold/leased, the overall market gets saturated and you must wait for those cars to get older and need replacement.
  • Revenues by market is important in GM revenue calculation.  US sales are accounting for 30% of total GM sales.  What is the current market condition?

http://cdn.tradingeconomics.com/embed/?s=unitedstatotvehsal&v=201601121541m&d1=19160101&d2=20161231&h=300&w=600
source: tradingeconomics.com
Current car sales in US are at pre-recession level.  We cannot plan on sales growth in the future years.  We could even expect sales slowdown in the future (near or far, I do not know).

China represents the biggest market for GM (35%).  We all know China is in a bad mood in 2016.  It will probably impact GM.  I expect sales decline in 2016 in China.  But if China represents alot of volume for GM, the China profitability is not at US level.  US profitability is 10 times better than China profitability.  A drop in China sales would result in low impact (0.5 to 1B) in GM profitability.

Cashflow

  • Cashflow is almost identical to net icome.  No big news here.  If we get a FP/E of 6, FP/cashflow is 6 or 4.8$ per share!

Estimates

My take on Future profitability

  • Current car sales will not deteriorate in the near future but will not increase needer.  I plan on flat sales.
  • China profitability will stay flat.
  • Mary Barra will continue improving operation by cutting non-profitable divisions and increase profitability (not included in estimates).
  • No new scandal will occur in the near future.
  • Current debt will stay the same.

Company estimated value

  • Future profitability will be close to the 7-8 billion range
  • At an industry P/E ratio of 12, we can estimate the market cap at 84 to 96M (roughly 60$ per share).

Disclosure : Author is Long GM

 

References

A Compelling Case for General Motors and its 4.5% Dividend Yield.

United States Total Vehicle Sales

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