Ticker: General Motors (GM)
Rating: Maintain at Hold
We have maintained General Motors at Hold while dropping price targets. The company is actually improving growth in sales at a better rate than we expected, but that growth is being offset by very high capital expenditure growth that hurts equity value. The company will have over $8B in capital expenditures, which compares to $4B in 2010. Our model saw our target price due to this increase. While capex means more future growth, these levels do impact equity value with uncertainty of how they translate into income overall. Ford (F) has a capex of $4B and Toyota (TM) $20B. Ford should make around $130B this year while GM $150B. We believe these high capex levels are high enough where they are a detriment to the company's stock. The company did do a great job of improving cash in the latest quarter, but margins are also suffering, which also made us slash some income expectations.
The company is getting hurt by Europe, China slowdown, and seeing margins drop. Things should bump along for a bit here, and we expect to see about 15% growth in operating income in 2013, which we are still standing pat on at this time.
"Our results in North America, our International Operations and at GM Financial were solid but we clearly have more work to do to offset the headwinds we face, especially in regions like Europe and South America," said GM chairman and CEO Dan Akerson. "Despite the challenging environment, GM has now achieved 10 consecutive quarters of profitability, which is a milestone the company has not achieved in more than a decade."
This is an issue for GM right now. The company is hurting to turn profits, especially in weak European markets where they are seeing red. The company has seen a significant drop in return on equity, which is one of the worst signs for a company's future. At this time, profitability remains weak for the company, and we do not see a reason to buy until they right this.
There is a lot of value in GM if you are looking at simply price to EPS. The problem for GM is that the company, for years, is going to have a hangover from there bailout/near bankruptcy. Most investors see GM as a low-growth, high-bureaucratic machine that is about as good as investing in the general market. The company's growth is pretty timid, but even these valuations show potential. The problem we see is that capital expenditures are holding this stock in check right now. Value is there, but value for what?
General Motors ranked 4th out of 12 in our Growth score. We do see good growth for operating income for the company coming out of the European recession. We expect operating income to grow 15% in 2013, 8% in 2014, and 5-6% in 2015 and 2016. The issue for the company is that competition remains very high, the company is not improving profitability, and they have exposure to Europe.
The company's financial health is good. They have a strong current and quick ratio. The company has pretty low debt to revenue ratios, and they are improving cash and FCF. Financial health, right now, does not appear to be the issue for GM, which may actually be the reason they are plagued. For that reason, if we see capex dip, GM may be a great pick up.