A lot of articles have been written about General Motors stock (GM) in recent months but most of them seem to miss the big elephant in the room, the fact that shareholders are getting more than $14 billion dollars for free, essentially reducing shareholders' purchase price of each $1 of GM stock to $0.76.
Are you wondering what I'm on about? Well, I'm talking about the company's deferred tax assets, or DTAs. DTAs are assets the company can use to offset its tax bill, effectively representing how much cash the company will be able to save by not paying the full tax rate in the future. These assets currently sit on the company's balance sheet with a net value of $33.085 billion dollars according to the latest 10-K filing. Of course this amount is not immediately realizable, it's composed of a series of expected future savings that can be modeled, and thus it's necessary to calculate the net present value of these savings rather than just taking the face value on the balance sheet.
The following outlines how I think about the current value I can ascribe to the DTAs. I assume a growth rate of utilization of the DTAs of 3% (2014), 20% (2015), 10% (2016), 5% (2017), and then 3% indefinitely after this, until the DTA is completely consumed sometime during 2027. These estimates are based on various sell side analyst estimates and my own 'common-sense check', and is shown in the table below:
What follows then is to calculate the net present value of these tax savings, shown below for different discount rates between 10% and 15%.
So according to my analysis the average net present value for these DTAs ends up being $8.57 per share, or $14.351 billion dollars. This is the value that investors should ascribe to the DTAs on GM's balance sheet.
Given GM's stock trades around $36 this implies either that 1) investors are valuing GM the car manufacturer ex-DTAs at $27.43 per share, or 2) investors are simply not giving the DTAs any credit, valuing the company at $36 per share and ascribing zero value to the DTA.
Both cases lead to the conclusion that when you buy a share of GM and you pay $36 for it, you immediately get $8.57 back in value just from the DTAs. This means that you are effectively paying $27.43 / $36 = $0.76 for every $1 of GM stock. Add to this the larger than 3% dividend and you have yourself a bargain!