I employ a bottom-up approach to stock selection, focusing on fundamental analysis that emphasizes a thorough understanding of the company, its prospects, its competitive environment, and whether the stock can be purchased at a reasonable price. I like to invest in companies familiar to me, or whose products are relatively easy to understand. The more familiar I am with a company, the better I understand the business and its competitive nature. In the article I describe stocks I found interesting to research from Marc Lasry's Avenue Capital portfolio and explain some facts about each company. It is important to evaluate not only each company's fundamentals and the whole "story" but the quality of the management. Avenue Capital is one of the best hedge funds and I think it is interesting to analyze which companies Avenue has under its radar.
General Motors (GM)
I like the strong last auto sales report from GM. The company confirmed June sales of 248,750 vehicles in the United States, up 16 percent year over year and the company's highest sales volume since September 2008. Chevrolet, Buick, GMC and Cadillac all reported double-digit increases. Retail deliveries were up 8 percent year over year. Fleet deliveries were up 36 percent versus a year ago due in part to the timing of customer deliveries. I think these results show that GM business is performing well and the stock may rebound from current deep undervalued levels.
In the last earnings report, General Motors reported Q1 earnings of $0.93 per share, excluding non-recurring items, $0.08 better than the Capital IQ Consensus Estimate of $0.85 while revenues rose 4% year/year to $37.8 billion vs. the $37.51 billion consensus. Management expresses an optimistic tone
"The U.S. economic recovery, record demand for GM vehicles in China and the global growth of the Chevrolet brand helped deliver solid earnings for General Motors. New products are starting to make a difference in South America, but Europe remains a work in progress. We'll continue to work on both revenue and cost opportunities until we have brought to competitive levels of profitability."
I think that Avenue Capital selected a great company that trades very cheap. Currently, shares of General Motors are trading at 6x consensus 2012 EPS estimate of $3.53. Over the last five years, shares have traded in a range of 5x to 10x trailing 12-month earnings. The stock is trading at a discount to the peer group, based on forward earnings estimates. The current P/E is at a 41% discount to the peer group for 2012.
Avenue also picked Lear (LEA), a company related to GM. Recently LEA reported Q1 earnings of $1.32 per share, $0.12 better than the Capital IQ Consensus Estimate of $1.20 while revenues rose 3.8% year/year to $3.64 billion vs. the $3.59 billion consensus. I think it was important that LEA management reaffirmed guidance for fiscal year 2012, forecasting fiscal year revenues of $13.85-14.35 billion vs. $14.49 billion Capital IQ Consensus Estimate.
CIT Group (CIT)
I think the recent sell-off in CIT shares is overdone and I view the current depressed valuation as a compelling buying opportunity. The market has deeply sold CIT due to misconceptions about its risk profile and its wholesale funded business model. On the contrary, CIT is a very different story post-bankruptcy and I think the stock is poised to revalue much higher as fears fade and progress gains momentum. I think Avenue Capital selected a conservatively managed financial company that trades at an attractive valuation.
The recent earnings report was not good for CIT. CIT Group reported Q1 loss of $2.22 per share, $0.64 worse than the Capital IQ Consensus Estimate of ($1.58). Net charge-offs were $22 million, or 0.42% as a percentage of average finance receivables, down from $140 million (2.32%) in the year-ago quarter and $24 million (0.45%) in the fourth quarter. Despite the earnings miss, I think that CIT capital ratios continue to be one of the strongest in the industry. Preliminary tier 1 and total capital ratios at March 31, 2012 were 17.6% and 18.5%, respectively, down from 18.8% and 19.7%, respectively, at December 31, 2011.
Cit shares are cheap. CIT shares currently trade at 0.8x P/BV, 82% discount to the industry average of 4.5x. The valuation on a price-to-book basis looks compelling.
Navistar International (NAV)
Recently, Navistar reported Q2 loss of $1.99 per share while revenues fell 1.7% year/year to $3.3 billion vs. the $3.69 billion consensus. Management stated that second quarter loss was driven by higher warranty and engine certification speculation. In fact, management gave an optimistic tone for the second half of the year.
"Going forward, we've identified a path for delivering strong profits in the second half of 2012. Historically, the second half is stronger across our businesses, and we expect to build on this with improved market share in North America, stronger global performance and further cost reductions across all operations. Additionally, we're making management and operational structure changes to align our organization in a more effective manner to drive these results."
Navistar CEO explained that core truck and buses businesses will be better in the second half of the year despite some softening in the company's global markets, particularly in Brazil and India. The company expects volume to recover in most of its markets and volume to improve in the second half.
I do not feel comfortable that NAV operates in an extremely cyclical industry with wild swings in revenue and profits. In addition, Navistar has significant amounts of debt outstanding that will come due over the next few years, which could deplete its coffers. I think the current macro environment is too risky to consider investing in this company