- An open letter to GM's board of directors and fellow shareholders encouraging the support of a share repurchase program in 2014.
- GM is dramatically undervalued: Ford Motor Company’s 2015 projected EV/EBITDA ratio is 74% higher than General Motors' EV/EBITDA ratio.
- "Old-GM" used to have an EV/EBITDA ratio that was 78% higher than today's better positioned "New-GM".
Dear GM Board Of Directors, dear fellow GM shareholders,
Over the course of my career as a long-term value investor, my best performing investments have resulted from opportunities that I like to call (rather controversially) "no-brainers that make me look foolish in the short run, but make me look pretty smart in the long run." Recent examples of such "no-brainers" have been my investments in Starbucks (SBUX, since 2005), Citizens Republic Bancorp (2009 till acquisition by FMER in 2012) and Best Buy (BBY, 2013).
In my opinion, a great example of such a "no-brainer" in today's market is General Motors (NYSE:GM) common stock. Ford Motor Company's (NYSE:F) 2015 projected EV/EBITDA ratio is 74% higher than GM's, and if GM were simply valued at the same multiple, its share price would be above $56 today. Even more astonishing is the fact that a historically more challenged "old-GM" used to have an average EV/EBITDA ratio that was 78% higher than today's financially and strategically better positioned "new-GM."
This is a dramatic valuation disconnect that simply makes no sense to me, even when taking into account the current and still-developing ignition switch recall. It also seems that many far more respected investors agree with my assessment and I wouldn't be surprised to learn that many of them are buying the company's shares as I am writing this letter.
GM's management has implied on more than one occasion that GM stock may be undervalued, and as the company rightly points out, it already has in place a generous dividend payout policy which was initiated earlier this year. I strongly believe, however, that this dividend payout policy is insufficient in delivering shareholder value given the extraordinary opportunity that the current stock price represents.
I therefore urge GM's Board to immediately expand its 2014 capital deployment plans by including a new share repurchase program, which should be effectuated as quickly as possible to take advantage of the prevailing opportunity.
When I consider that the company had more than $33 billion of cash as at December 31st, 2013, and that consensus earnings are expected to be around $5-6 billion in 2014 and almost $7.5-8 billion in 2015 (both figures exclude the additional favorable impact of GM's large deferred tax assets), I struggle to find a single reason not to start with such a program as it would certainly not threaten the company's "fortress balance sheet." Given this massive cash position and robust earnings generation, GM is perhaps one of the most overcapitalized companies in the US today. Regardless of what liquidity it may require with respect to unprecedented investment, the still-developing ignition switch recall, further pensions de-risking, preferred stock buybacks and general strategic flexibility for innovation moving forward, I believe the unprecedented degree to which the company is currently overcapitalized would overcompensate for any such investments. Said another way, I believe that the combination of the company's unprecedentedly enormous net cash balance, robust annual earnings, and tremendous borrowing capacity provide more than enough excess liquidity to afford both the use of cash for any necessary ongoing business-related investments in addition to the cash used for a share repurchase program.
It is my belief that it is the responsibility of GM's Board, on behalf of the company's shareholders, to take advantage of the currently existing large and unmistakable opportunity in the company's own shares. Indeed, I believe that by choosing not to initiate a share repurchase program, the directors are actually performing a great disservice to the owners, especially smaller shareholders who may not be in a position to buy more stock themselves.
I therefore urge GM's Board to do the right thing for its shareholders and to initiate a meaningful share repurchase program this year.
I also invite all General Motors shareholders, especially large institutional holders, to push for an initiation of a share repurchase program by writing to the Board themselves and exerting pressure at the upcoming annual shareholder meeting in June.