Here I summarize information from the blogosphere, my personal views, the filings of GM and investment research in order to develop a bull case for General Motors (GM). Needless to say, there are also reasons that add plenty of risk to being long GM, and I address some of them in every point. After all, let us not forget that GM went through a painful bankruptcy and restructuring period. And they are still not consistently profitable!
However, I found more upside. Upside that can bring GM back to profitability in the long run, making this a buy with a one year investment horizon at a price target well above the current $28.22 per share.
1) A clean balance sheet
Whenever a company goes through the painful process of restructuring after bankruptcy, radical changes are made to avoid disappearing for In the case of General Motors, changes were introduced in order to first clean up the balance sheet and then to add some strength. The result: about $14.7 billion in cash and marketable securities. Since at 28.22 dollars per month the current market capitalization is of 38.56 billion, we can say that GM has cash representing 38% of its total current market cap. Of course, a great amount of these $14.7 billion cannot be brought to the U.S. without paying the corresponding taxes. This does not make the cash useless, though. It gives the company the protection it so much needed before the bankruptcy.
2) Forget about poor sales in Europe. China is growing.
We do not know up to what extend the depressed macroeconomic atmosphere in Europe has damaged GM's sales performance. Most likely, Europe will regain some profitability in the next years. But instead of waiting for Europe sales to get better, management is focused on what is still growing. Even if we take into consideration the Chinese growth rate slowdown, the Chinese market still has a very bright future when it comes to cars.
First, there is plenty of room for improvement: only 85 of 1,000 people have cars. Second, there is a steady growth in national car sales, even between a period as turbulent as 2007-2012 (from 6.7 mm to 15.5 mm). GM is and most likely will continue benefiting from this situation. Not only it is building two Chinese assembly plants expected to be in operation by 2014, they also are enjoying the popularity of Buick brand amongst Chinese. The way of doing business in China looks also very promising: building the Cadillac and Buick brands, opening the right amount of factories and making strategic joint-ventures (e.g. with Shanghai's SAIC Motor Corp) work.
As for the numbers: sales actually decreased 10% in February (there is seasonality involved) but they were up 7.9% in the first two months. Too early to make any definite conclusion.
3) Revenue is slowly growing
Despite the awful macroeconomic atmosphere in 2011, GM managed to increase its revenue from $104.6 billion dollars in 2009 to $152.26 billion in 2012. Not even one year saw a decline in revenue. And while the growth rate is decreasing, the potential of foreign markets is not.
4) The U.S. macroeconomic situation will not hit GM severely
As a matter of fact, the primary source of car revenue comes from overseas. General Motors has difficulties growing in economies experiencing heavy macroeconomic pain, like Europe last year or the U.S. this and the next years, as domestic demand gets the impact of $1 trillion in budget cuts. But General Motors is also growing in economies where the car sector is growing: China and eventually South Africa. This fact, combined with the cash cushion that management is building, shall prepare the firm to take the effect of a possible worse than expected domestic national car demand contraction.
5) Top investors have shares
A bit of piggy backing is never bad. As for December 31st, Berkshire Hathaway Inc. (BRK.B) owned 25 million shares. David Einhorn's Greenlight Capital is suspected to own some shares as well. David Tepper's Appaloosa Management has included GM (and also Ford) among its top ten picks. This is not a coincidence: with a trailing PE of 9.67 and a PEG ratio of 0.51, this is a value stock. Not for the faint of heart, though!
6) A right size supply view
Things have changed internally. There is a pre-bankruptcy GM and a post-bankruptcy GM. One of the main reasons why GM went bankrupt in 2008 was because they could not deal anymore with elevated fixed costs.
Well, fixed costs so far have been reduced from $34 billion to $25 billion and capacity utilization has been taken to a 100% near level. What happened here is that GM was practically forced by the adverse circumstances to redesign its supply. Instead of overproducing cars and thus hurting their own brands, GM now favors a right size production view and an optimal supply chain management. There is also plenty of room for improvement here, because fixed costs were reduced even in a context of rising commodity costs.
The role that new management has is crucial for this to continue happening. Let me point one signal: the current CEO, Dan Akerson, favors the execution of a plan to reduce vehicle platforms from 20 to 14 by 2018. This means that market share will be sacrificed in order to obtain profitability. I believe this business model is realistic and effective. These are not times to fight for market share, both nationally and internationally. These are times to make brands stronger in strategic locations, cut fixed costs and build a cash cushion strong enough to eventually face pension liabilities or a worse than expected domestic car demand contraction, without stop caring about market share.
7) Brands will always be brands?
Well, we used to believe in that. However, in the case of GM, there are 2 reasons that make me believe in their brands even nowadays. First, that the business model has changed from an overproduction scheme to a right-size supply chain management. This will help to strengthen brands by reducing the room for discounts. Second, that GM is growing in emerging economies were brands like Buick or Cadillac have long been desired! But only recently people are starting to be able to afford it. GM management is taking advantage of this by getting into the right markets seriously.
8) Although Gross Profit Margins remain low, do not forget its true potential.
Let us face it. GM keeps missing the Street's expectations. I believe this is mainly because of 2 reasons: first, the company is still under restructuring. Second, the overall macroeconomic environment is not favorable. Specifically, the company was hurt badly in its Europe segment, with a $700 million adjusted loss in the last reported quarter. Overall, fourth quarter earnings were of 48 cents per share excluding items, a much lower figure than the 39 cent profit in the comparable year ago period. However, revenue still rose to $39.2 billion, from a $38 billion a year ago.
Both the focus on emerging economies, new products, the enforcement of traditional brands and the decreasing trend in fixed costs can help GM to deliver consistent profit margins and eventually beat the street consensus but it is clear that this will not happen in days. It is a long run process. The good part of the story is that the process seems to have started more than a year ago, as our analysis suggests. Those who are to obtain the best return on investment, however, are not those who start getting long once the effects of the structural changes in the firm are perfectly clear but those who foresee them even at 28.22 a share. It could be wonderful.