|Shares Out. (in M):||1,805||P/E||N/A||N/A|
|Market Cap (in $M):||52,692||P/FCF||7.0x||N/A|
|Net Debt (in $M):||-7,670||EBIT||9,450||9,450|
Sign up for free guest access to view investment idea with a 45 days delay.
Although GM has been written up on a few other occasions such as February 15, 2013 by Dogstar, January 6, 2012 by stanley 339, and February 17, 2011 by Ragnar0307, with all due respect, I wasn't satisfied with the depth of the explanation of (1) optimizing the trade, (2) accounting for the liabilities, (3) how the balance sheet was restructured, (4) investigation of the fixed cost restructuring, (5) investigation of the impact of restructuring on pricing power, (7) competitors valuations, and so forth. I apologize if the price has shifted since I wrote this idea, but I would bet that there will be opportunities to acquire at the price shown in this document based on the forced seller’s activity. Enough introduction, on to the show.
A large forced seller and an underappreciated permanent restructuring has created an excellent long-term investment opportunity. Using the complicated capital structure to our advantage, an investor can earn a 90% return based on elimination of a valuation discount, not to mention several potential upsides.
There are several securities: Series A Preferred shares, Series B Preferred shares, Series A warrants, Series B warrants, VEBA warrants, common shares and options.. But there’s two in particular that are interesting.
The Series B warrants allow owners to convert each warrant into a common share of New GM for $18.33 per warrant until July 10, 2019. Trading at $12.03 per warrant, the Series B warrants break even at a common share price of $30.36 or 8% higher than the current share price of $28. If the share price increases to $41 per share, Series B warrants will generate a gain of 90% vs. 45% on common shares. However, if the share price decreases to $26 per share, the Series B warrants will generate a loss of 40% vs. a loss of 10% on common shares. The warrants sell at a premium of $2.36 per share or 8% and expire in 2019, providing leverage for an annual cost of only 1.4% per year.
Another interesting option would be long-term January 2015 LEAPS, which break even at $34 per share and would generate a return of over 190% at $41 per share.
General Motors Company (“New GM”) has been written up a great deal over the past year. Despite the coverage among news organizations, financial publications, and investment researchers, it remains undervalued owing to (1) major selling shareholder overhang, (2) underappreciated restructuring, and (3) discounted valuation relative to competitors.
In December 2012, the Treasury owned 500 million shares or 27% of New GM. The Treasury announced its intent to fully exit its investment in New GM within 12-15 months as part of winding down the TARP. On December 19, 2012, New GM purchased and cancelled 200 million shares from Treasury or approximately 11% of its shares outstanding. The Treasury sold approximately 5.5 million shares in January 2013 and another 17.5 million shares in February 2013. The Treasury will liquidated its remaining stake of 280 million shares, or 15% of the fully diluted shares, by March 2014.
As of March 2013, New GM has total diluted shares outstanding of 1.805 billion, comprised of 1.366 billion common shares, 100 million Preferred Series B shares which convert into 152 million common shares in December 2013, 136 million Series A warrants which convert into common shares, 136 million Series B warrants which convert into common shares, and 15 million restricted stock units.
The fact that the Treasury is liquidating 20% of the float of New GM creates an opportunity for new shareholders. First, it injects uncertainty, which makes potential investors fearful. Second, it provides an opportunity for meaningful appreciation once the overhang associated with the liquidation ends by March 2014.
Despite the fact that New GM has been so extensively written up, there aren’t public documents that clearly explain the legacy obligations, bankruptcy and restructuring and their respective impact on enterprise value. The enterprise value of New GM as of March 2013 is $43bn, after the effect of adjustments related to its U.S. pension deficit, non-U.S. pension deficit, Series B Preferred shares and Series A Preferred Shares, and includes the effect of eliminating legacy obligations such as retiree healthcare and other obligations such as asbestos, environmental claims, legacy warranties and union litigation.
$43bn = $5bn automotive debt - $13bn cash + $51bn of fully diluted market capitalization
$51bn fully diluted market capitalization = 1.8bn shares x $28 per share
For perspective, GM’s retiree healthcare deficit was more than $47bn in 2006. Today, the enterprise value of New GM is less than Old GM’s historic union healthcare liability.
Eliminated its legacy obligations. A few of the changes to New GM’s senior capital structure:
The major hangup for New GM investors is the pension and post-retiree benefit obligations. Let’s start with the easy stuff – the legacy obligation which was terminated as part of the bankruptcy and restructuring:
However, during the financial crisis and bankruptcy, the Auto Task Force, GM and the UAW reached an even better agreement. In the new agreement, the VEBA was funded with 10% of New GM common equity (160 million shares), $2.5bn of notes (retired in October 2010), $6.5bn of Preferred Series A shares, and 46M warrants at a strike of $42.31 (exercisable until December 31, 2015). Again, New GM is free of the hourly retiree healthcare obligation, and it only cost New GM $14bn. Healthcare expenses have been reduced by $4-5bn annually since 2006, or $3bn annually since 2008.
That’s the entirety of the capital structure. Net cash of ($7)bn, market capitalization of $51bn, and enterprise value of $43bn. However, is New GM worth more than $43bn?
EBITDA improved by $22bn, and New GM generated $14bn of EBITDA in 2012. New GM also received $1.4bn of dividends from its Chinese JVs, invested $8bn in capital expenditures, and improved overall free cash by $23bn, generating $7bn of cash flow in 2012.
Interest expense have been reduced from over $2bn to nearly zero. Taxes are going to be approximately $1bn. While New GM has $7bn of U.S. federal and state net operating loss carry forwards, New GM will pay taxes on international profits representing approximately 10% of pretax profits in 2013. Preferred dividends are excluded because they have been backed out of the enterprise value. The run rate for 2012 suggests free cash flows of $6.3bn to New GM.
Valuing a business that generates $14bn of EBITDA, $7bn of free cash and $6bn of free cash flow for only $43bn seems overly conservative. Perhaps the market doesn’t believe the viability of the restructuring. How has New GM been able to create $22bn of new EBITDA in the period from 2008 to 2012? New GM is divided into four regions: North America, Europe, Rest of World, and China JV’s. New GM also has a Finance and a Corporate group. Let’s review each.
In summary, New GM has been massively restructured – capacity, distribution channel, brands, overhead, and union agreement. These fixed cost reductions are sustainable and permanent. Moreover, as we will see, these cost reductions allow New GM to improve its top line. Although North American sales volume declined from 3.6 million units to 3.0 million units from 2008 to 2012, North America revenues actually improved from $83bn to $89bn! That’s because although the loss of sales volume impacted sales by $16bn, the increase in product pricing improved sales by $22bn. This price increase may surprise some people unfamiliar with New GM. Let’s walk through why:
The restructuring actions enabled approximately $9bn of permanent hard cost savings and $6bn of price improvements. New GM is finally competitive in North America.
GM Europe: Complicated, Messy
GM Europe is comprised of GM’s three brands: Vauxhall, Opel, and Chevrolet. The brands are sold in that order of premium, middle and value. However, the pricing doesn’t always follow the strategy, and occasionally Opel is sold for less than Chevrolet. In summary, it’s a complicated and messy business.
New GM is changing business practices, cutting its overhead costs, negotiating with German unions to reduce costs, closing a German facility, fixing its dealership network and unveiling new cars – in addition to restructuring actions taken prior to 2008. However, staring at a map of Europe’s assembly facilities, New GM’s facilities are located in high cost countries Germany and UK. For comparison, Volkswagen’s facilities are located primarily in Czech, Poland, Slovakia, Hungary and Bosnia. This puts New GM at a competitive disadvantage, particularly in a market with overcapacity, lower priced cars, and declining demand.
GM Europe has declined from $0.9bn EBITDA in 2008 to ($0.7)bn EBITDA in 2012, or a decline of ($1.6)bn. The loss of sales volume impacted sales by $6bn, and the loss of pricing has impacted sales by $6bn, resulting a net top line reduction of ($12)bn from 2008 to 2012. Somehow GM Europe took out $10bn of costs (including variable and fixed), but that’s still not nearly enough. Free cash flow was a negative ($1.8)bn in 2012. Not much positive, except that New GM is getting pummeled by analysts, and New GM VP & CFO of GM Europe said that GM will be breakeven EBIT (cash flow neutral) by 2015. That sounds like an upside case.
New GM has vital operations, collectively referred to as “Rest of World” herein, which are comprised of design and engineering offices, plants, and dealer networks in South America (where Brazil and Argentina are major markets) and International Operations (where South Korea, Australia, India, and Middle East are major markets). New GM sold 1.8 million units in its Rest of World region in 2012, which is more than New GM sold in Europe in the same period. Only one region, Brazil with 35%, accounts for more than 10% of Rest of World sales.
New GM is in the top three of auto companies in the Rest of World region, alongside Toyota and Volkswagen. Sales will grow based on demographic-driven demand alone, even without changing market share. For instance, while the U.S. has 800 cars per 1000 people, India has 18 cars, South Korea has 363 cars, Argentina has 314 cars, Columbia has 71 cars, Egypt has 45 cars, Venezuela has 147 cars, and Indonesia has 15 cars. Volkswagen expects South American annual car sales to grow by 62%, Indian annual car sales to grow 129%, and other worldwide annual car sales to grow by 33% between 2008 and 2018.
From 2008 to 2012, New GM generated increased sales volume of $4bn, increased pricing of $4bn, and net top line improvement of $7bn. Costs increased by $5bn across the regions. Rest of World EBITDA was $3.6bn in 2012, more than doubling since 2008. Rest of World Free cash flow was $1.4bn, which represents an improvement of $1.4bn since 2008.
Breaking these amounts down, GM South America generated $0.8bn of EBITDA (a decline of $0.6bn from 2008) and $0.3bn of free cash flow. South America results have declined as a result of tougher South American competition – in particular cost and pricing pressures in Brazil. GM International Operations EBITDA increased by $2.6bn since 2008.
New GM owns approximately 50% of three different China-based joint ventures. These joint ventures sold 2.8 million cars in 2012. For comparison, GM North American sold 3.0 million cars in the same year. New GM reports the value of these joint venture interests on its balance sheet. In 2008, the joint ventures were valued at $1bn. In 2009, New GM began using “Fresh Start Reporting” wherein GM began valuing these business based on a DCF calculation with long-term WACC, growth-rate, and market share assumptions. In 2009, New GM reported the value of the joint venture interests as $7bn. These interests remain valued at $7bn in 2012.
Another datapoint on the value of New GM’s joint venture interests in China is the value implied by recent transactions involving these joint ventures. In September 2012, New GM purchased 1% of Shanghai General Motors Co., Ltd. (SGM; GM now owns 50%) for $119m or a valuation of $6bn. In November 2010, GM purchased 10% of SAIC-GM-Wuling Automobile Co., Ltd. (SGMW; GM now owns 84%) for $52 million, valuing SGMW at $500 million.
It goes without saying that the demographics in China are amazing. Today, there are only 85 cars per 1000 people in China, as compared to 797 cars per 1000 people in the U.S. Some analysts think that vehicle sales in China will reach 30 million per year in the next decade – more than U.S. and Europe annual volumes combined. New GM is positioned well for Chinese growth. New GM is the #2 auto manufacturer in China by market share with 2.8 million units in 2012, behind only Volkswagen Group China with nearly 3.0 million in the same period. In addition, GM has electrical vehicle technology, which may be required to compete in the near future. Of course, the Chinese government could outlaw new car purchases due to pollution or traffic, and competition remains very fierce.
GM’s Chinese JVs are required to distribute 100% of the previous year’s net income. The distribution occurs in the second quarter of the following year. In 2006 and 2008, GM China did not pay dividends. In 2010, New GM received distributions of $0.7bn relating to 2009. In 2011, New GM received distributions of $1.2bn relating to 2010. In 2012, New GM received distributions of $1.4bn relating to 2011. Indications are that 2012 was a record year for Chinese auto sales, and New GM should receive a similar or greater amount in 2013.
GM generated most of its EBITDA through its finance arm in 2006. However, GM sold half of its finance arm to Cerberus in 2005 and then lost the remainder in bankruptcy. New GM did not have a financing division in 2009. Therefore New GM acquired AmeriCredit Financial Services Inc., which provides auto loans to dealerships in the U.S. and Canada, for $3.5bn in July 2010, rebranding it GM Financial. GM Financial generated $100 million EBITDA in 2010, $700 million EBITDA in 2011, and $1bn of EBITDA in 2012.
In November 2012, GM Financial then entered into definitive agreements to acquire GMAC’s international leasing operations in Latin America, Europe and China for $4.2bn to provide a captive finance unit in all markets. The transaction for GMAC International Leasing will close in mid-2013 and would add over $0.5bn of EBITDA to GM’s results on a pro forma basis.
GM Corporate includes various non-operational issues such as interest, income taxes, premium for purchasing stock from UST, non-cash debt charges, impairments, as well as central corporate charges.
New GM is fixed. North America is restructured, Europe is being stabilized, Rest of World operations are strong, China is strong, and GM Finance is growing. Now New GM is competitive. So how is New GM valued against its competitors – specifically Toyota, VW, Honda, Daimler, BMW and Ford. Based on 2012 results, New GM is given a lower EBITDA, free cash flow and EBIT multiple than all companies except for BMW.
More interesting, New GM trades at a significant discount to Ford in terms of multiple of EBITDA (3x vs. 4x), free cash flow (7x vs. 11x), and EBIT (5x vs. 7x). Assuming that the market removes the discount placed on New GM’s relative to Ford, New GM’s share price would be $35 per share (EBITDA), $45 per share (free cash flow), $41 per share (EBIT). Potential catalysts for this to occur include alleviation of concern about the forced seller and greater understanding about New GM.
For those readers still interested in the story, here’s clarifications to a few misconceptions about New GM:
GM’s market share in North America declined from 23.8% to 16.9% from 2006 to 2012, or a total of 6.9% points of decline. In the U.S., which makes up over 85% of New GM’s North American sales, GM’s market share declined from 24.2% to 17.9% from 2006 to 2012, or a total of 8.5% points of decline. However, there’s a better way to look market share than total sales volumes. We need to adjust sales volume to include only New GM brands (Chevrolet, GMC, Buick, and Cadillac) and exclude brands that were jettisoned in the bankruptcy (Saturn, Pontiac, Hummer, Saab). After these adjustments, the sales volume of New GM brands actually improved from 2.5 million units to 2.6 million units from 2008 to 2012, while market share declined from 19.5% to 17.9% or only 1.6% points. The majority of the loss of market share is related to four jettisoned brands.
For context, from 2006 to 2012, Toyota’s U.S. market share declined from 15.5% to 14.4%, or a total of 1.1% points. New GM’s brands lost only 0.5% more market share than Toyota, despite all the bankruptcy. Who has been taking share from both Toyota and GM? Volkswagen grabbed 2.3%, Nissan grabbed 1.7%, Honda grabbed 0.6%, and other brands (Koreans such as Kia, Hyundai) grabbed 6.4%. The fear of a massive 8.5% decline in GM’s U.S. market share is overblown. Now, it remains to be seen if New GM can gain market share now that its costs are competitive.
U.S. auto sales were 14.5 million units in 2012, an improvement from 2011, but still a historically low year. From 2001 to 2007, average annual U.S. vehicle sales volume was 17.1 million units per year. Annual vehicle sales of less than 16 million was unthinkable. It’s possible that U.S. annual sales volumes rise to 17 million vehicles, or an increase of nearly 20%. Assuming market share remains constant, New GM would sell 470,000 additional vehicles priced at $29,500 per vehicle or $14bn additional U.S. sales. If each new car earns a 30% EBITDA margin, this would be $4bn of additional EBITDA.
Total U.S. Housing starts averaged 1.3 million per year from 2002 to 2012, or 67% higher than the 770,000 starts in 2012. Total U.S. pickup sales averaged 2.2 million per year from 2002 to 2012, or 20% higher than 1.8 million units in 2012. U.S. housing starts and pickup sales were 97% correlated from 2002 to 2012. As total U.S. housing starts improve, total U.S. pickup sales will improve.
New GM has a 35% share of the U.S. pickup truck market, selling 645,000 pickups in 2012. Returning to the 2002 to 2012 average, New GM could sell 121,000 additional pickup trucks. Also, New GM is finally releasing its next generation of pickup trucks in May 2013, which had been delayed due to the bankruptcy. With an improvement in U.S. housing starts to 1.3 million per year, and assuming that New GM at least keeps its market share, pickup trucks sell at a 50% premium MSRP to New GM’s North American average, and pickup trucks sell at 50% EBITDA margins, New GM would generate $2.7bn additional EBITDA.
There’s a misconception that New GM wages are not competitive with foreign plants in the U.S. It’s true that in 2006, New GM’s all-in average hourly wage for its 74,000 hourly workers was $78 per hour in 2006 including OPEB. However, the competitive gap with foreign automakers in the U.S. was meaningfully closed during the restructuring.
After the effect of the Tier II changes, hourly voluntary buyouts, and the VEBA, New GM wages have moved towards parity with Toyota. Today New GM’s all-in average hourly wage for its 46,000 hourly workers is approximately $56 per hour. This compares with $55 per hour at Toyota and $47 per hour at Nissan. Center for Automotive Research estimates that average blended labor rates in 2015 will be $60 per hour at GM, $56 per hour at Toyota, and $49 per hour at Nissan.
New GM is truly a global auto manufacturer with a worldwide network of designers and engineers. Major design offices are located in South Korea, Australia, Brazil, and Germany, in addition to Warren, Michigan. The design for the Chevrolet Camaro was created by a South Korean. The design and development for the Chevrolet SS was created in Australia. The design and development for the new Chevy Cruze is being created in Germany. Today, New GM is coming out with cars such as the Chevrolet Corvette Stingray, Cadillac ATS, Cadillac XTS, Chevrolet Cruze, Camaro Camaro, and a GMC truck lineup. Many don’t realize that it takes at least five years for automobiles to go from concept to dealership floor. New GM has been designing and engineering these vehicles from 2008 to 2013. The lead engineers and designers behind these vehicles were not lost during the bankruptcy. There’s plenty of public information on the design studios, and intelligence suggests that morale is higher than any time in the past decade.
In addition, perhaps the largest remaining long-term cost lever that New GM has at its disposal is to finally use “global architectures” for its vehicles. This means that New GM will use the same design solutions for groups of vehicles and make them scalable based on the size of the vehicle – i.e with the new Alpha global architecture to be introduced around 2016, New GM will be able to build the ATS, CTS, Camaro and SS on the same lines at plants around the world. New GM can spend less resources designing for multiple architectures, invest less capital in tooling, produce cars in lower numbers at optimal plants, and capture volume purchasing discounts.
Clearly, New GM has the most expertise in full size pickups, full size sports utilities, Camaros, and Corvettes. However, New GM hasn’t been able to focus on four core brands and so few vehicles in decades. It’s a major change in business model. According to Bob Lutz in public interviews, in terms of financial resources, Chevrolet will gets the bulk of the resources, Cadillac will receive the second most resources and will emerge as a global brand, Buick will receive the third most resources and share costs with Chinese JVs; GMC will receive the least to fund a distinctive brand as its architectures are shared with Chevrolet.
Buick will be an exciting component of New GM going forward. New GM sold only about 150,000 Buicks in the U.S. in 2012, but historically sold over 200,000 per year. Intelligence suggests that New GM is going to be focused on reviving the Buick brand in the next few years. In addition, New GM is going to focus on the Cadillac brand. Cadillac sold 150,000 vehicles with 5 models (only 2 new) in the U.S. in 2012, compared to BMW with 280,000 vehicles and 10 models, Mercedes with 300,000 vehicles and 13 models, Audi with 140,000 vehicles and 11 models and Lexus with 240,000 vehicles and 9 models. Cadillac may be able to increase its luxury sales when it refreshes the remainder of its lineup, and New GM will focus on turning Cadillac into an international luxury car brand.
Just kidding. Automotive is really tough. However, New GM is finally competitive again.
Adding up the above, there is potential for incremental $8bn of EBITDA, clearly showing that New GM has of opportunities for enhanced profitability.
Disclosure and disclaimer: All information is taken from publicly available 10-Ks, 10-Qs, earnings and sales call transcripts, www.autoline.com, www.goodcarbadcar.com, www.gmauthority.com, and other public sources of information. You should assume that I own a personal investment in the securities discussed. For example warrants, common shares, options of GM. Because the information in this post is based on my personal opinion and experience, it should not be considered professional financial investment advice. All information and data is for informational purposes only. I make no representations as to the accuracy, completeness, suitability, or validity, of any information. I will not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. All information is provided AS IS with no warranties, and confers no rights.
|show sort by|
Are you sure you want to close this position GENERAL MOTORS CO?
By closing position, I’m notifying VIC Members that at today’s market price, I no longer am recommending this position.
Are you sure you want to Flag this idea GENERAL MOTORS CO for removal?
Flagging an idea indicates that the idea does not meet the standards of the club and you believe it should be removed from the site. Once a threshold has been reached the idea will be removed.
You currently do not have message posting privilages, there are 1 way you can get the privilage.
Apply for or reactivate your full membership
You can apply for full membership by submitting an investment idea of your own. Or if you are in reactivation status, you need to reactivate your full membership.
What is wrong with message, "".