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Executive Summary

  • GM's mixed results in 2013 pushed many investors in panic mode, but it may be overdone.
  • As the share price approaches the company's book value and the dividend yield approaches 3.5%, we may be nearing the bottom.
  • In the long-term, the share price should appreciate in a double-digit percentage, supported by the strong fundamentals as the panic subdues.

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Lately, GM (GM) hasn't been receiving much love from the investors. The investors were already selling the shares of the company as we were heading towards the earnings report, and the earnings report only accelerated the selling after the company failed to beat the estimates (it reported a net profit of 67 cents per share; whereas, the analysts were looking for 87 cents per share).

Many investors were upset that GM's operations outside of North America haven't proven very profitable for the company. There are worries that the company's North American profits will have to fund its operations elsewhere while the company takes its sweet time to create a profitable plan in the other parts of the world. Now that the company isn't fighting for survival, many feel that GM started to feel safe, secure and comfortable and the sense of urgency is slowly disappearing at the company.

After selling 9.7 million units of vehicles in 2013, GM wants to pass the 10 million mark in 2014. This looks like an easy task but there is a lot of work for the company to do at a time competition is working very hard to steal market share. In fact, GM's global market share remained flat between 2012 and 2013 (at 11.5%) which tells us that the company is able to grow just as fast as the car industry and it may not be able to outperform the global market anytime soon. Now, GM will have to offer deeper discounts and more deals than ever in order to gain any meaningful market share. In fact, last year, GM's revenue per vehicle fell from $16,376 to $16,020 so that the company could keep its market share intact (although part of this decline can be attributable to relative weakness of the US dollar for the most part of 2013).

Things aren't completely bad for the company though. Last year had some ups and downs for GM and some of the positives were achieving investment grade rating, posting record sales in China, improving volumes for Chevrolet brand, and showing great improvements in Europe for the first time in more than a decade.

Since being saved by the government in 2009, GM turned into a huge cash cow. The company generates cash flow like not many companies in the market can. GM currently has $37.08 billion in liquid assets (cash, short term investments and long term investments combined) and this amount can be used in many different ways, such as paying off the pension obligations, acquiring smaller brands, increasing production capacity, buying stocks back and increasing dividends in a meaningful way. No matter which route the company chooses to, it will increase value for the investors (as long as they don't issue one of those one-time special dividends that don't accomplish anything except for pumping the share price up for a few days). On GM's balance sheet, we see $36 billion in debt; however, most of this debt belongs to GM Financial (the arm of the company that provides loans to car buyers and leasers, as well as a variety of financial services) and the company's automotive segment has pretty low levels of debt at around $6 billion.

During 2013, GM's management achieved increasing the company's book value from $36.24 billion to $42.61 billion. Given GM's current market value of $55 billion, the current book value limits the downside for the investors greatly. It is very rare for a company to trade below its book value unless the company's profitability or survival is in question and we all know that this is not the case for GM for the foreseeable future.

A lot of investors avoid GM for political reasons because it took a lot of money from the tax payers and caused the government to report a loss as large as $10 billion. This may limit the number of buyers for the company and continue to have an effect on the volume, but I wouldn't expect this to affect the stock in a negative way since most of these people will not be shorting GM either.

GM's current dividend yield is 3.44% and this is above the average dividend yield of S&P 500 at 1.95%. Those investors that are hungry for a yield will join those that are supporting GM's share price from falling much further. If GM's dividend yield were to go above 3.5%, this would bring in many additional dividend-hunters and support the price. After that, each 0.1% of an increase in dividend yield would bring in more and more yield-hunters that are looking for a safe place to park their money for income. Along with GM's book value, its dividend rate will also keep the shares from falling too much.

Given how the company is expected to earn between $3.50 and $5.00 next year, I wouldn't be surprised to see that we are very close to finding a short-term bottom for GM. Notice that I don't do any technical analysis and I try to identify the bottom by looking at fundamentals such as the book value and dividend yield of the company because I have seen much better use for fundamental indicators than technical indicators even in the short term.

Once the trend reverses, GM's fundamentals support a share price as high as $50 in the medium to long-term as the company continues to be a cash cow, improve its book value and become more flexible in terms of being able to afford higher dividends and buybacks. If we exclude the company's cash and liquid assets of $36 billion, it is trading for a forward P/E of 4, which is extremely low even for a blue chip that operates in a cyclical industry. Investors have very low expectations of GM and the company can beat these expectations very easily in the long term.

Source: Will GM Find A Bottom Anytime Soon?