53-Year Low: Re-valuing General Motors

Forget being identified as a company with a share price at a 52-week low – this  past week General Motors (GM) was identified as a company with a share price at a 53-year low. Goldman Sachs issued a “Sell” rating expressing concerns about the broad auto sector and suggesting GM may need to raise capital. The broad auto sector issues can be summarized by this quote from a CIBC economic report on oil prices – “Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today—a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.” Any forecast growth for GM isn’t coming from the US market.

GM Valuation

GM’s revenues decreased from US$195.3 billion in 2004 to US$181.1 billion in 2007 – a -2.5% compound annual growth rate. Our assumptions of revenues for the next three years are US$173.75 billion in 2008 growing to US$190.25 billion in 2010 – a 4.6% compound annual growth rate (2008-10). We have projected EBITDA margins of 4.5% in 2008 then a flat 5.5% moving forward. We have used a terminal growth rate of 3%. We calculated this terminal growth rate based on year three growth of 3.5% dropping to a 3% stable growth rate by year 10. Our view is that this growth is coming from outside the US market – GM has approximately 60% of sales from international (i.e. non-US) markets. We used a terminal capital expenditure number of US$8.5 billion. We have used a WACC (discount rate) of 9.5%.

Valuecruncher Valuation GM

Our analysis incorporates the cash and debt on the GM balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$10.49 which is 9.2% below the current share price of US$11.55.

GM presents an illustration of the sensitivity of key inputs for a discounted cash flow [DCF] model like we use here at Valuecruncher. There are a range of key assumptions where small changes can make significant changes to the valuation. The most significant of these in our model is the EBITDA margin in 2010. If GM can get the EBITDA margin to 6.0% in 2010 (we are projecting 5.5%) then, with all other assumptions constant, we produce a valuation of $26.03 (125% above the current share price).

However if we reduce the EBITDA margin to 5.0% in 2010 we place a zero valuation on the GM shares. This doesn’t make the analysis less valuable – it simply illustrates the areas where there are opportunities and risks associated with the on-going GM financial performance.

Based on our analysis the current valuation looks slightly overvalued – but very sensitive to the assumptions identified (especially EBITDA margins). If GM can beat the numbers identified then there is potentially significant upside – if they can’t then the future could look bleak.

Play with our assumptions – what does your analysis say?

Disclosure: None

Comments

[weiwentg]

for everyone's info, Dodge and Cox stock and balanced funds have positions in both GM and Ford. I have to wonder what the managers were smoking - and I own balanced.

honestly, I wouldn't be surprised if one of the big 3 went under in 10 years or so. frankly, it would be for the better. they have used their political leverage to block environmental legislation before, and this would serve them right while at the same time reducing overcapacity.

if Chrysler, say, goes under, then there could be some upside for GM as they capture a bigger slice of the market.

[Doug Korthof]

Sounds like your analysis is flawed, if a small swing in EBIDTA can make such a difference. More importantly, volume has to increase, imo, while GM is operating under the assumption that it must shrink. GM success in the past was tied to high volume, not shrinking numbers.

[jimsep]

My opinion is that 3% growth for GM is a big stretch. Until they have more choices for the US car buyer, they will probably experience negative sales growth through at least 2010.

As to EBITDA margin improvement, the need to produce smaller vehicles with lower margins will offset any gains from cost savings.

I wonder what a shrink in EDBITDA margin will do to your valuation.

[pel]

Agree with the earlier poster that if any goes under, it likely would be Chrysler and not GM or Ford but Ford is pretty weak. Detroit's problem is changing production over to small, gas-efficient cars and trucks and ASAP. I own GMAC Bonds and even though Cerebrus owns 51 % of GMAC and GM the remaining 49 %, they are working their way through the glut of over-valued housing inventory and their exposure to it vis a vis loans. I would agree with the earlier poster that Detroit should not be bailed out but do think that the Federal Govt. should assist in the subsidy of aviation fuel for domestic carriers inasmuch as it would seem that the same Govt. (with it's Iraq war policies) has so angered the Arabs & OPEC that their way of getting even is to make it tougher on all Americans (Rich & Poor) in terms of paying for oil, gas, energy, etc. !!!!! I find it very strange that last week the President of OPEC threatened G-8 POWERS with $ 200 barrel oil costs IF IRAN WAS INVADED, but there is no press reporting of this statement anywhere ???? Thoughts ????