GM Requests A Tabula Rasa And Restructures

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 |  About: General Motors Company (GM)
by: Prescient Investment Analysis

General Motors (NYSE:GM) is distancing itself from bankrupt "Old GM." Upon emerging from doldrums of recent years, shedding and eliminating brands such as Pontiac and Saab, and recently falling under the lead of another new CEO, many have a positive opinion of the company's future. Further, the stock goes ex-dividend on March 14th, paying $0.30 quarterly and offering a good yield at close to 3.4%. Things appear to be shaping up, so it could go higher and higher while making cash payments on the way.

Since assuming leadership on January 15th, GM's CEO Mary Barra has made objectives known. The company seeks to maintain a fortress balance sheet and also to have 10% profit margins. Reducing costs are paramount, and non-disruptive restructuring is a means.

The $56 billion firm's operations are global. In the process of downsizing on other continents, it has recently announced results that some might have found disappointing. However, investors have been aware of the corporation's paring down in Australia, and restructuring in Europe, for some time. Things are actually proceeding fairly well. Pursuant to signing a new labor agreement that keeps Opel plants in Germany operational, and ceasing mainstream distribution of Chevrolet in Europe, another way of viewing the situation is that GM is now ahead of Ford (NYSE:F) there. In fact, the corporation expects GM Europe to break even by mid decade.

The company also expects a market for about 85 million new vehicles in 2014, approximately a 2% increase from 2013. GM is launching a substantial number of models this year.

It is investing heavily in alternative fuel and advanced propulsion technologies. However, cash flows from operations are a precursor. Governmental regulations are pertinent as the NHTSA and EPA have coordinated fuel economy and greenhouse gas emissions through 2025 for light duty vehicles (2018 for heavy duty trucks). GM forecasts a need "…to sell a significant volume of hybrid electric vehicles, as well as implement new technologies…" in order to meet domestic requirements in 2022 (Source: 10-K).

Competition in The People's Republic of China is aggressive; however, at this time GM is meaningfully positioned. The only way for domestic producers to operate there is through a joint venture, and GM has 10 (3 are 50% owned, the rest take a minority interest); with government-affiliated entities. In China, nameplates include Buick, Chevrolet, Cadillac; and Baojun, Jiefang, and Wuling brands.

With so many moving parts, respected and influential sell-side research can provide an especially valuable notion of the company's future prospects. EBITDA and capital returns to shareholders are pertinent. Goldman Sachs is leading the way, with the stock on its "Conviction Buy" list. The Wall Street firm foresees margin improvements in the summer and fall and also anticipates buybacks on top of the dividend!

1) We believe the company has at least somewhat de-risked the story by setting expectations for 2014 and 1Q14 low. Our own 2014 EPS forecast is 5% above the implied guidance of $3.80 and we think 1Q14 results could be helped by the timing of truck deliveries in NA, which were pushed into 1Q14 from 4Q13.

2) We think investors will want to get in ahead of attractive near-term catalysts, namely a 200bp YoY margin acceleration in 2Q14 and 150bp in 3Q14 driven by pricing, mix, and easing launch costs - and we still think share buybacks are likely this year.

3) Very little of this appears to be priced into the shares which on our estimates trade at 2.7x and 2.3x 2014 /2015 EV/EBITDA and 8.8x and 6.75x on P/E.

GM's current quarterly filing is also its annual one, the 10-K. Therefore, copious material is available for review, including a statement of Risk Factors. Some things that may become increasingly important considerations include:

  • Cost of steel, particularly corrosion-resistant which is only available from a limited number of suppliers such as United States Steel Corporation (NYSE:X).
  • Several legal actions are specified in the annual filing. Only a fraction sound as if they are continuously concerning:
    • General Motors of Canada Limited is defending against a class action of dealers and trial is scheduled to occur in Q3 2014
    • An inventory management securities class action stemming from a 2010 initial public offering has had an amended complaint filed since February 1st, 2013.
  • Foreign currency fluctuations.
  • Investment grade credit rating with Moody's, currently lower BB+ with Standard and Poor's. (This could improve).
  • Pursuant to impairments, goodwill of $1.6 billion remains as a result of the acquisition of AmeriCredit Corp in 2011.

General Motors is asking consumers and investors for a new beginning. There are several reasons it is worth considering, including improved operational efficiencies, commitment to strong finances, and a solid dividend. Goldman Sachs rates it a Conviction Buy. Though there are some considerations in the auto company's Form 10-K, nearly everything else above is currently in its favor.

Disclosure: The author is long GM. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.