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General Motors (NYSE:GM) is often referred to as Government Motors for how big of a bailout it got from Uncle Sam. Government Motors is a pretty funny nickname. It is not hard to judge a company based on outward appearances, we do it all the time. The presidential elections had a lot of finger pointing over how General Motors should have been dealt with, but in the end it does not matter. General Motors is a great investment opportunity.

Qualitative Analysis

Source: Information pertaining to GM came from the shareholder annual report, shareholder quarterly report, along with YCharts.

General Motors still maintains a strong position here at home. Despite all the bickering over whether or not GM is a competitive car company, the market share figures shown below implies that the company is not found on the road dead yet.


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General Motors still maintain its top position in terms of market share within the United States. Foreign competition has been challenging GM's dominant position with Toyota (NYSE:TM) at 17% market share; the domestic brands have lost a bit of its edge. Even so, General Motors is still able to jettison out some pretty cool looking cars like the Corvette Stingray 2014 model.


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Source: Picture from Top Speed

So I guess we can't deny the cool factor of owning a GM branded car right, I mean it was made by the government! Okay so, let's ignore the catchy moniker and get back to the point. The design team over at General Motors has not lost touch yet. GM is on the right track when it comes to developing, manufacturing, and advertising its products.

Chinese citizens have no political affiliation to either the Democratic or Republican Party like United States citizens do, so there's no emotional backlash to the Obama bailout of General Motors. Which is why General Motors has been losing some market share in the United States but is making up for it by expanding its market presence in China.


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Over the past three years General Motors market share decreased from 18.80% to 17.50% in the United States (a 130 basis point decline). General Motors has been able to expand its market presence in China from 12.90% to 14.60% (a 170 basis point gain). The gains in foreign markets are offsetting the losses in domestic markets. This implies that General Motors is focusing the lion share of its efforts on gaining market share in the Asia Pacific, but more specifically China.

Mechanical engineering products (cars) have an elasticity rating of 1.3. This implies that consumer demand increases as prices decrease and that consumers are price sensitive to the price of car products. GM's market share continues to expand in China, which implies that General Motors is both price and product competitive. This can be further backed by General Motors' long history of developing, manufacturing, servicing, and marketing automotive vehicles. Competing in the car space involves large up-front capital and requires companies to operate at economies of scale. I believe that General Motors is relatively impervious to outside pressures because of the up-front investment it would require for a start up car company to compete in an open market place. The few that have succeeded and survived are far and in between [Hyundai (OTC:HYMLF) and Tesla Motors (NASDAQ:TSLA)]. Despite the positive case studies, there are many car companies who haven't seen the light of day. This further implies that General Motors' competitive position is fairly secure, and that General Motors' competitive environment is relatively stable.


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General Motors has been able to improve its revenues over the past 5 years, post great recession. General Motors owes a lot of its success to its ever-expanding market presence in foreign markets. General Motors' primary source of car revenue comes from overseas markets, which further supports my optimism behind the company going into future years.


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Profit margins have remained fairly stable until the most recent quarter. This has been due to a mix of rising commodity costs and impairment of assets. In the 2012 fiscal year General Motors reported $27.14 billion impairment for assets held for use. This basically means that plant assets have had their value reclassified into the actual market value. This is basically another way of explaining to investors that the stuff GM bought yesterday is now worth less today than what it was worth yesterday.


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The impaired asset figures have had no significant impact on General Motors' cash flow, and in fact the cash flow has continued to improve over the past 5-years. The improving cash flow is the key driver behind the optimism analysts have for the company. General Motors' profitability will improve as write-downs on plant and property assets have been recorded on the books in the last fiscal year. Going forward, the EPS figures will better reflect the company's performance.

Overall I am highly optimistic on General Motors.

Technical Analysis

General Motors is in an up-trend and is stuck in the middle of a symmetrical triangle formation. It is likely that the stock will break out of the upper-trend line by the end of 2013.


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Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Averages. The stock will appreciate over the long-term, and is in the beginning stages of a multi-year up-trend.

Notable support is $24.00, $25.00, and $27.15 per share. Notable resistance is $29.15, $30.50, and $32.50 per share.

Street Assessment

Analysts on a consensus basis have high expectations for the company going forward.

Growth Est

GM

Industry

Sector

S&P 500

Current Qtr.

-39.80%

N/A

119.90%

10.70%

Next Qtr.

-7.80%

232.80%

43.10%

16.20%

This Year

4.60%

-2.40%

13.80%

8.10%

Next Year

28.30%

41.80%

20.60%

12.90%

Past 5 Years (per annum)

2.07%

N/A

N/A

N/A

Next 5 Years (per annum)

16.28%

13.51%

33.76%

9.03%

Price/Earnings (avg. for comparison categories)

8.35

198.79

40.97

21.12

PEG Ratio (avg. for comparison categories)

0.51

3.71

1.76

2.14

Source: Table and data from Yahoo Finance

Analysts have high expectations, as analysts on a consensus basis have a 5-year average growth rate forecast of 16.28% (based on the above table). This growth rate is above the industry average for the next 5 years (13.51%).

Earnings History

12-Mar

12-Jun

12-Sep

12-Dec

EPS Est

0.85

0.74

0.6

0.51

EPS Actual

0.93

0.9

0.93

0.48

Difference

0.08

0.16

0.33

-0.03

Surprise %

9.40%

21.60%

55.00%

-5.90%

Source: Table and data from Yahoo Finance

The average surprise percentage is 20% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2008

$ (53.47)

-

2009

$ 56.62

-

2010

$ 3.11

11.85

2011

$ 4.94

4.1

2012

$ 3.10

9.3

Source: Data from YCharts

The EPS figure shows that throughout the 2008 period, the company had negative earnings. Throughout 2009 earnings rapidly improved (the change in EPS was due to restructuring, refer to table below).


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Following 2009, the company was able to stabilize earnings in an EPS range of $3.11 to $4.94. The company has been able to fortify its balance sheet throughout the period, and is showing continued improvements in annual revenues since filing for bankruptcy.


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Source: Data from YCharts

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore one of the largest risk factors to GM is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.


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By 2018 I anticipate the company to generate $8.88 in earnings per share. This is because of product growth, improving global outlook, cost management and continued development overseas.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5 years.


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Below is a price chart incorporating the past 3 years and the next 6 years. Detailing 9 years in pricing based on my forecast and price history on December 31st of each year.


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Source: Data from YCharts and price history is from Yahoo Finance.

Investment Strategy

GM currently trades at $28.15. I have a price forecast of $33.21 for December 31st 2013. The stock is currently trading below valuation, and should be bought at pull backs as a part of a longer-term accumulation strategy.

Short Term

Over the next twelve months, the stock is likely to appreciate from $28.14 to $33.21 per share. This implies 18% upside from current levels. The technical analysis indicates a long-term up-trend. While the previously mentioned price forecast using fundamental analysis further supports the assessment.

Investors should buy GM at $28.14 and sell at $33.21 in order to pocket short-term gains of 18% in 2013.

Long Term

The company is an exceptional investment for the long term. I anticipate GM to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). GM's primary upside catalyst is international expansion, product development, share buy-backs, and cost management. I anticipate the company to deliver upon my forecasted price target of $87.30 by 2018. This implies a return of 210.23% by 2018. This is a great return for a cyclical stock.

A higher yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 calls at the $30.00 strike. The call premiums trade at $3.75. The price forecast for the end of 2014 is $42.74. The rate of return if the calls expire at $42.74 is 240%, the option will break-even when the stock trades at $33.75.

The risk-to-reward on the option is compelling.

GM has a market capitalization of $38.4 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

Government Motors is not found on the road dead anymore. The bankruptcy restructuring has helped General Motors to become a more competitive car brand internationally. The underlying economics that back the company along with its unique positioning keeps me optimistic on this cyclical play.

The conclusion is simple: Buy General Motors.

Source: General Motors: It Is Better Than Ever Before