GM Repurchasing Two Hundred Million Shares from the US
RJ is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Wednesday morning, US auto giant General Motors (NYSE: GM) announced that it will repurchase 200 million shares from the US government for $5.5 billion. The US government also announced that it will sell its remaining 300 million shares opportunistically over the next 12-15 months. The sale will leave the US with a loss, but for the purpose of investing, the loss means little to us.
Though the price GM will pay—approximately $27.50 per share—exceeds the current market value, it is still lower than our median fair value estimate. More importantly, however, it removes the worry (overhang) that the Government-owned shares would be dumped on the market, putting downward pressure on the share price. We like the move for both reasons, and we think the repurchase could be highly accretive to GM’s earnings going forward since it reduces shares outstanding by approximately 11%.
A $5.5 billion commitment is also a strong statement for the US auto industry, indicating management’s confidence that the recovery will continue going forward. Europe remains weak, but we think the region’s auto market could bottom in 2013 or 2014. In the meantime, all automakers with exposure to the region, such as Volkswagen and Ford (NYSE: F), will work to reduce costs and ward off losses. GM’s balance sheet remains strong with over $10 billion in net cash after the repurchase, and years of deferred tax assets will allow the company to grow earnings at low tax rates for years to come.
Although we ultimately like the move, GM’s execution remains somewhat lackluster, in our view. We believe both Ford and Toyota (NYSE: TM) are doing a significantly better job delivering products that US consumers want. Both Ford and Toyota are selling pickup trucks at a much stronger rate than GM, which continues to stockpile truck inventory. However, GM is refreshing nearly its entire lineup over the next few years, so we think the firm could recover some lost market share.
Shares of GM look fairly valued, in our view, and we continue to hold shares of peer Ford in the portfolio of our Best Ideas Newsletter. We think Ford has superior management and execution (less Lincoln), as evidenced by its fantastic operating margin expansion in recent years.
Valuentum holds shares of Ford in the portfolio of its Best Ideas Newsletter. 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!