The End Of Government Motors
Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As part of the bailout of the American auto industry nearly four years ago, the US Treasury received 500 million shares of the new General Motors (NYSE: GM) which emerged from the deal. This stake represents nearly a third of the entire company and was viewed by many as a reason to avoid GM stock. The nickname "Government Motors" arose and cast a stigma over the company. But, finally, the end of the 'Government Motors' era is near.
Last week the Treasury announced that it would sell 200 million shares back to GM for $27.50 per share, and sell the the remaining 300 million shares on the open market over the next 12-15 months. This caused the stock to jump to around the level of the repurchase price, and most recently sells for $27.66 per share.
I believe that GM got a good deal on this buyback. The shares have long been suppressed by the memory of the bailout, and hopefully this news will help alleviate this problem. Is now the time to buy GM? Let's find out.
The Balance Sheet
* Data from 8-K
GM is sitting on quite a bit of cash. At the end of September there was a total of $33.7 billion in cash and cash equivalents on the books. In addition to this there is $7.5 billion in long-term investments, raising our total to $41.2 billion. On the liability side, total debt is $16.7 billion, including $6.3 billion in short-term debt due within a year. Interest payments on this debt totaled $128 million for the Q3 2012, or roughly $500 million annually.
The big drag on the balance sheet is the pension and post-retirement benefits, which is listed at $32 billion. Taking the total cash and investments balance and subtracting the debt and pension obligations we arrive at -$7.5 billion. With 1.663 billion diluted shares outstanding this represents -$4.51 per share.
Instead of looking at net income or free cash flow, I prefer to use owner earnings. First defined by Warren Buffet, my version of owner earnings is the net income plus depreciation, amortization, and other non-cash charges not related to fluctuations in working capital. I subtract from this capital expenditures and add tax-adjusted interest payments. This value represents the average cash which the 'owner' of the company can expect to extract from the company each year after all necessary expenses are paid. Often, owner earnings and free cash flow are very similar. However, in some cases, they can deviate dramatically.
Here are the relevant figures for fiscal 2011.
Owner earnings in 2011 was $5.6 billion, significantly higher than the reported free cash flow of $1.09 billion. Owner earnings smooth out fluctuations in working capital and give a more realistic measure of profitability. As far as I can tell, the company has only reported cash flow from operations for the first three quarters of 2012 and not a detailed cash flow statement, but given that operating cashflow has increased from one year ago it's safe to say that owner earnings should be at least $5.6 billion for fiscal 2012. On a per share basis, this is $3.38 per share.
How Much Is GM Worth?
I'll use a discounted cash flow analysis to estimate the fair value of a share of General Motors. I'll assume that owner earnings will grow by 6% annually for the next 10 years and by 3% annually after that. The average analyst estimate for the five-year annual earnings growth rate is 10.93%, so these numbers seem reasonable. I'll use a discount rate of both 12% and 15% and use these values to define a fair value range. Using the above parameters and subtracting the net debt from above, I arrive at a fair value range of $30.52 to $43.08 per share.
The Bottom Line
GM is paying $27.50 per share for a stock worth at least $30. This is a great use of cash and creates shareholder value. As automobile sales continue to recover from the lows during the financial crisis GM is in a great position to prosper. Compared to American rival Ford (NYSE: F), GM has far less debt. Ford has the distinction of being the only American automaker to not take bailout money, but as a result had interest payments topping $4 billion on its debt in 2011, compared to GM's $500 million.
GM was briefly crowned the "No. 1 car company" by sales in 2012 before being overtaken by foreign competitor Toyota (NYSE: TM), which was recovering from problems arising from natural disasters in Japan and Taiwan. Going forward, GM is much leaner and more profitable than its pre-recession predecessor, and this should allow the company to thrive. When auto sales reach pre-recession levels, GM will be a money-making machine.
TheBargainBin 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!