- A sharknado of tort actions ahead for years to come.
- GM culture still eats strategy for breakfast.
- Big guns like Warren Buffett may be bailing out.
- And yet… hugely optimistic 2015 analyst projections may be reasonable.
For General Motors (NYSE:GM), the hits just keep a-coming, as FM radio stations used to brag when promoting their song play lists.
But GM has nothing whatever to brag about in the grinding parade of bad news about its massive vehicle recalls and its questionable behavior that started with faulty ignition switches, but is now up to more than 15 million recalls for a laundry list of defects and $1.7 billion in recall expenses so far - with the emphasis on "so far."
Worse yet, the brunt of the U.S. legal industrial complex is only just now getting started against GM.
The inevitable onslaught of personal injury, class action and wrongful death lawsuits is likely to feed a sharknado of tort actions for years to come. [One is reminded of the thousands of Ford (NYSE:F) Explorer rollover cases, which came to light in 2000, and which were still being settled as late as 2013.]
The New GM, Same As The Old GM
Under the circumstances, an investor might conclude GM would be rushing to make fundamental changes in its culture and its leadership right about now, but that conclusion would be wrong.
The company shoulders on with its CEO Mary Barra - a second-generation career worker whose fans gush over the fact she knows GM (and only GM) through and through. In June, a United Auto Workers official is set to join the GM board of directors for the first time at the insistence of a UAW trust fund that is now GM's largest shareholder. And only last week, the company re-hired a former PR communicator to come back and manage its (same old?) story once again.
Since GM is rock adamant about continuing to hold the hand it dealt itself, then, the question, becomes whether investors should stay in the game with the auto giant.
No Damage To The Brand?
Itay Michaeli, auto analyst at Citi Investment Research, insisted on Business News Network this month the GM travails have done no real damage to the brand. Citi has a "Buy" on the stock with a $47 price target -- steep optimism for a stock with a recent price of about $33.
Michaeli divines a strong second half 2014 for GM, and predicts a strong run-up in the share price to back-half earnings. (Skeptics, though, might point out a possible head and shoulders top formation already being played out, with the head formed in the optimism of December, and the right shoulder already in the rear-view mirror.)
GM was down 19.7 percent for 2014 going into the Memorial Day holiday, and Q1 SEC filings showed some big private equity and hedge fund players are moving elsewhere. Even the stalwart Warren Buffett was less enamored of GM - his Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) vehicle sold 10 million shares during Q1, about a quarter of its holdings in the automaker's stock.
Then there is the matter of earnings. GM's 2013 EPS was $3.18 vs. $3.24 in the prior year. Analysts surveyed by Capital IQ expect 2014 EPS at $3.23 - certainly a flattish 3-year outcome.
Consensus Estimates: Uniformly Close And Optimistic
However, Michaeli of Citi sees 2015 EPS in the "mid to high $4 range," and 19 analysts surveyed by Capital IQ agree - they see FY 2015 with a consensus $4.77 EPS. Likewise, the mean consensus 2015 EPS estimate from Thomas Reuters I/B/E/S, at $4.75, also forecasts sunny skies ahead.
How to account for the positive change that so many analysts see ahead?
One reason is that GM is determined to cram as much recall impact into 2014 as it can, hence the total recalls of over 15 million cars this year - about the same as total U.S. annual car sales. Taking charges up front now can help cushion GM for the legal payouts later.
Net operating cash flow is up smartly, GM's debt to equity ratio is less than the industry average, and revenue per employee ($712K vs. the industry average of $629K) is a positive.
On a valuation basis, GM also displays some longer term positives. Its 5-year average P/E is only 9.65 vs. an industry average 16.00.
On top of that, March and April sales were stronger than expected. China sales appear to hold great promise.
Perhaps GM's biggest ace in the hole is advanced technology, which should be a driver of margins, and a key for achieving analysts' lofty EPS outlook. Chips are embedded everywhere under the hood now, and 4G connectivity has arrived as well. The time when diagnostics can be performed from afar - and even repairs via software - is just up the road. Increased robotics will mean even more production cost savings that can flow towards profits.
2015: A Bridge Too Far?
The carmaker may yet find a path to overcome its lumbering bureaucracy, and reform its culture that has long eaten strategy for breakfast, as Peter Drucker might say. From where GM sits now to where the analysts' optimistic 2015 profit estimates reside is a long, long trip, however.
It is reasonable to expect GM can experience a bright future once it gets past its current recall travails, cultural limitations or not. Certainly many Americans are hopeful for the future of a company so interwoven into the fabric of the national economy.
But a prudent investor would want to wait a couple of quarters to see evidence of growing profits - perhaps until 2015 - before putting new money to work there.