Transformers’ Bumblebee: a singular Chevrolet Camaro

Under the Hood, General Motors (WIP)

At 5.3x earnings, General Motors (GM) trades at a modest valuation relative to its peers despite an enticing 4.3% dividend yield, a sustained shares buyback program, and a seemingly healthy operation with strong persistent operating cash flow. This is a glimpse under the hood, an attempt to determine whether or not going prices afford overlooked value.

Disclaimer: This is not intended as financial advise. This is by no means an exhaustive assessment of the business, rather a quick superficial overview. I do not own GM shares, nor am I employed with the company.

General Motors designs, builds and sells cars, trucks, crossovers and automobile parts globally. It provides automotive financing through General Motors Financial (GMF). GM sells vehicles marketed under the brand names: Buick, Cadillac, Chevrolet, GMC, Holden, Opel, Vauxhall, Jiefang and Wuling through its dealers network to retail customers, fleet customers, rental car companies and governments.

GM was bailed out by the US government when it ran out of money in the aftermath of the 2008/09 financial crisis. It emerged from bankruptcy reorganization proceedings with a new chairman, financial liabilities halved, and a leaner cost structure with the Hummer, Saturn, Saab and Pontiac brands divested. The Treasury sold its equity stake in 2013.

As of June 2017, GM had a $240.3 billion (USD) balance sheet with $25.7 billion in cash, cash equivalents and marketable securities, $89.1 billion in debt, $32.4 billion worth of deferred tax assets, $24.4 billion unfunded pension plan liabilities, and a $54.8 billion market capitalization. EV was $117.9 billion.

Over the past 5-years period, sales increased at par with US GDP at 2.3% y/y, with most of the ‘growth’ stemming from GMF activities, pacing at 49.1%, from 1.3 to 5.7% total sales. Automotive sales halved top line growth at 1.2%. Operating margin averaged 3.3% excluding 2012 dramatic operating loss, result of a one-off goodwill impairment charge. Significant deferred tax assets allowed GM to shun tax expenses.

Operations provided a steady cash flow stream growing 17.3% CAGR, with 52.5% net income paid out to stockholders: 1/2 in dividends, 1/2 in share count reduction. The remainder was infused in the business leveraged at a mounting leverage ratio — up to 1.6x from 1x D/E by 2016 — mostly in PP&E, marketable securities (near cash), working capital, and strategic acquisitions.

M&A deals included Cruise, an automated car R&D business, Maven, a ride-sharing partnership with Uber, and a 9% equity stake in Lyft, the popular ride sharing platform.

So what’s it worth? Assuming:

  • lackluster auto sales growth, feature of a highly competitive market place with supply capacity greatly in excess of demand;
  • attrition in the lending (particularly subprime) business with interest rate levels expected to normalize;
  • narrow EBIT margins pressured by: competitive landscape, entrenched labour unions and increasing input prices (oil and aluminum); and
  • normalizing tax expenses given erosion of deferred tax assets.
Spreadsheet available here: http://bit.ly/2gw8VaO

I appraise GM’s operating assets at around $101.5 billion. With $25.7 billion in cash, $89.1 billion in debt, $204 million of minority interests and 1,470 billion diluted shares outstanding, $GM is worth about $25.8 per share or 7.2x forward earnings, a 34.1% discount to going seemingly inexpensive prices.

Conclusion: hold (or hedge). Considering mounting debt and diminishing earnings power, I see GM as a risky investment at going prices notwithstanding attractive relative valuation multiples. Provided GM sustains its dividend and shares buyback policies, dividend yield and share count reduction might provide the rational for a solid trade if paired with a clever hedge.

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