Our more detailed report analysis is available, but the GM thesis summary is as follows:
We view buying shares of General Motors Company (GM) as a way to invest in a severely beaten down stock that has valuable assets with limited downside. After exiting bankruptcy in 2009, GM's management team has concentrated on streamlining its business, shedding non-core vehicle brands, cleaning up its balance sheet, and building up its finance business. Despite seeing continued topline growth in 2012, the company's stock price has fallen ~22% from its IPO price as recent weakness in European end markets pressures profitability, and GM's largest shareholder (the U.S. Treasury) continues to be a market overhang. GM is focused on re-building its brand value as it continues to enter new developing markets, invest in research and development, and market its brands aggressively. Our view is that at a ~$26 stock price, you are essentially owning: (1) GM's North America, South America and International auto businesses at trough multiples, (2) a lucrative finance business, and (3) a call option on GM's European auto business.
GM operates all around the world, with its predominant market share in the U.S. The portfolio of brands GM is known for within the U.S. includes: Buick, Cadillac, Chevrolet and GMC. Outside the U.S., GM sells another portfolio of car brands to thousands of customers, including: Buick, Chevrolet, GMC, Opel, Cadillac, Daewoo, Holden, and Vauxhall. A breakdown of its LTM sales by geographic end market is as follows:
- GM North America: 60%
- GM International Operations: 15%
- GM Europe: 14%
- GM South America: 11%
GM operates predominantly through an authorized dealer network of about 21,000 dealers worldwide. This number has come down from almost 22,000 as the company has been moving to be more of a lean operator with less brands.
GM Financial (or "GMF") specializes in purchasing retail automobile installment sales contracts originated by GM and non-GM franchised and select independent dealers in connection with the sale of used and new cars. This segment also offers lease products through GM dealerships in connection with the sale of used and new cars that target customers with sub-prime and prime credit bureau scores. GMF first started doing business in 2010 (subsequent to GM's $3.5bn acquisition of AmeriCredit Corp), and currently is generating extremely good cash flow as interest rates are close to zero, and the segment is lending credit at mid-teens interest rates to its customers. GMF then makes the spread on how much it borrows vs. how much it lends. GMF has been increasing its exposure to customers with FICO scores of 599 and below. Currently about 72% of its receivables are exposed to "599 and below" customers, while at the end of December 2011, that percentage was 65%. Nonetheless, the percentage of delinquencies within its credit portfolio has declined from 8% at the end of 2011 to 7.4% currently (as of 9/30/12). During 2011, the average rate earned by GMF (or charged to the consumer) was 13.7%. Compare this to the average cost of debt GMF has to pay, which was 2.7% during 2011. This 11% spread, along with a low-capex business model, has allowed GMF to print cash.
GM's valuation is most compelling as, in our view, at ~$26/share, you are essentially paying trough multiples for its auto businesses while also getting a cash-cow finance business, all the while getting its European assets essentially for free. Let's lay out the assumptions that we need to assume to get us to this depressed value of ~$26/share:
GMNA: ~3.0x EBITDA for a business that is #1 is its market, generates 12% EBITDA margin, grows topline at a mid-teens percent, and has one of the most recognizable brands names in the world.
GME: This is clearly trough earnings, as growth is negative and a restructuring is currently being put into place. This is the time when you make money in a business -- when consumer sentiment is bad and the end markets are experiencing a recession. You invest in the business so that when volumes recover, you make multiple on your money. But let's assume this business is worth ZERO, as it still generates negative EBITDA.
GMIO/GMSA: Both growing EBITDA at a nice clip, with obviously some volatility baked in due to government regimes, FX fluctuations, choppiness of consumers, etc. Assume a 4.5x mid-point EBITDA multiple on these businesses, which are top players within these growing auto markets.
DCF valuation through 2020: Assume that interest rates tick up starting in 2015 (as communicated by the Fed) so the cost of GMF borrowing goes up continually, loan growth is at a "less than" global GDP type trend, and bad debt expenses trend up gradually through 2020 (see Appendix for DCF).
From a current asset value perspective, assume that 7.4% of the receivables portfolio is impaired, which is 100% of the "delinquent" accounts GMF has on its books today (so assume to residual value once these vehicles are repossessed by GM).