GM Getting Ready to Run on its Own Steam
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Under the Troubled Asset Relief Program, or TARP, the US Treasury was given the mandate to prop up a number of ailing companies that faced the imminent threat of bankruptcy. General Motors (NYSE: GM) was forced to accept one of the largest and most humiliating of these taxpayer bailouts, which earned them the nickname “Government Motors.” Now, as the company has been restructured with the aid of government funds, this era may be coming to an end. GM is starting to buy back their shares from the Treasury, and appears ready to stand on its own legs again.
GM, headquartered in “Motor City” Detroit and with a market cap nearing $43 billion, is one of the world’s largest automakers. Its brands include Chevrolet, GMC, Opel, Daewoo and Vauxhall. Marketing its cars and trucks worldwide, the firm also offers safety solutions, as well as financing. The stock is up almost 40% in the last 12 months, and has a volatile 1.8 beta. The stock does not offer a dividend.
The government’s offloading of its stake in GM is without a doubt a vote of confidence for the company. While the Treasury is likely to take a loss from the operation, it will ultimately be viewed as a success as the objective was to save jobs rather than turn a profit. With this sale of 200 million shares, the $418 billion TARP program is approaching its end. This move should allow GM to start rebuilding its tarnished reputation, and hopefully for the US auto industry to increase sales as a result.
Since bottoming out in 2008, the US auto industry has seen a significant rebound in recent years. This year Americans have been buying cars at an annualized rate of 14 million vehicles, and GM earlier this year boosted its 2012 sales forecast. GM EPS beat forecasts every quarter this year so far, with Q3 earnings blowing past the consensus by over 55%. These encouraging results show that the carmaker has undergone a significant turnaround, and has emerged from the bailout as a stronger, more competitive company.
Valuations and Metrics
Currently, GM trades at 10.26x earnings, which is a discount to the 13.79 industry average, and only 1.37 to book. The price to sales is even lower at 0.28. While the operating margin isn’t particularly awe-inspiring at 4.67%, the return on equity is quite decent at 13.26%. The company moreover has almost $32 billion in cash. The stock is definitely cheaper than the world’s recently crowned largest automaker, Toyota (NYSE: TM). Toyota trades at 15x earnings. While its price to book is lower at 1.07, the Japanese carmaker has almost $150 billion worth of debt. It is perhaps interesting to note that GM was the world’s number one manufacturer of automobiles before being overtaken by Toyota this year.
As the Treasury finally unloads its stake in GM, it seems as if the company has successfully turned things around since the bailout. Car sales are rising and EPS is beating expectations across the board. With renewed confidence, the firm should now be able to shed its “Government Motors” image. Additionally, the stock is valued reasonably at the moment compared to the industry and its largest competitor.
DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!