Opportunity Shifts Into High Gear for This Restructured Car Manufacturer
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the article “50 Unfortunate Truths About Investing”, Fool contributor Morgan Housel listed 50 inevitable truths that investors should read to adjust their investing habits. I found one quote quite interesting:
“Twelve years ago General Motors (NYSE: GM) was on top of the world and Apple was laughed at. A similar shift will occur over the next decade, but no one knows to what companies.”
Indeed, great American pride General Motors had its big underfunded pension, which was much greater than its market capitalization dated back in 2009, and it had to file for Chapter 11 bankruptcy and subsequently be removed from Dow Jones Industrial Average. So how about General Motors now, after three years time? Will it have the potential to be on the top of the world as it used to be? Is it now a great opportunity for investors?
The new General Motors in America now is much smaller than the old GM, after it reduced its US dealerships from 6000 to 3600, shut down 14 US plants, and cut a fourth of its 80,000 employees. It is currently operating in four main brands including Buick, Chevrolet, Caddilac and GMC. As of December 2011, GM global market share has risen to 11.9%. GM is still the market leader in the US market, with a 19.2% market share. The second and third player in the US is Ford (NYSE: F) with 16.5% and Toyota (NYSE: TM) with a 12.6% market share. Interestingly, in 2011, the majority of vehicles that GM sold were in two main markets: the US, in which it sold 2.5 million vehicles, and China, in which it sold 2.54 million vehicles.
David Einhorn, in the Value Investing Congress in October, was not shy about trumpeting his bullish attitude for this car manufacturer. Einhorn mentioned that GM was in much greater shape now as the cost had been reduced significantly, along with manageable pensions. The balance sheet looked healthy. Indeed, as of September 2012, GM has more than $42.6 billion stockholders’ equity, only $10.3 billion in long-term debt and $6.3 billion in short-term debt. Furthermore, the cash and marketable positions are large, with $23.2 billion in cash and $10.4 billion in marketable securities. The post-retirement benefits and pensions are booked around $38 billion in total. The large reserve of liquid assets is enough to cover its pension and postretirement benefits, plus the fact that GM will be generating more cash flow in the years to come is also a huge positive.
Furthermore, David Einhorn said that GM has around $70 billion in tax shields, which offe a huge advantage for its future cash flow. GM wouldn’t have to pay US taxes for a decade. When GM was trading at around $23 per share, he said that its enterprise value would be only $6 billion with all those factors accounted. In addition, GM’s EBIT would be around $6.6 billion. With the majority of cash, which earned nearly nothing, the P/E ratio was depressed.
Trailing twelve months, GM delivered a 9.45% return on invested capital and 2.94% net margin. Both figures are lower than those of Ford, with 17.12% ROIC and 13.35% net margin. Toyota enjoys a higher net margin of 3.5% but much lower ROIC of 3.42%. However, the catch for GM is an extremely low valuation. Whereas Toyota and Ford have 8x and 10.2x EV/EBITDA, GM’s is just at 1.9x.
On the last note, GM made itself into the portfolios of many famous hedge fund managers. David Einhorn currently owns nearly 21.6 million shares, accounting for 8.2% of his total portfolio. Monish Pabrai holds nearly 2.3 million shares, or 19% of his portfolio. Berkshire Hathaway has just increased its stake in GM in the third quarter to 15 million shares. Personally, I think the new GM could make its way back in the near future to expand its market leader positions in the US and China. Patient investors might consider GM to be a part of their long-term portfolio.
hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and 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!