By Matt Doiron
David Einhorn's Greenlight Capital has lost a lot of money on its year-plus long investment in General Motors Company (GM). Our database of 13F filings shows that in the summer of 2011, the fund moved heavily into the stock, owning 14.7 million shares at the end of September of last year. At that time the stock was trading just above $20 per share (though it had dropped over the course of the quarter, and looks to have had an average price of about $25). The stock is currently at about $24, though Einhorn has added shares; for example, Greenlight's stake grew by 18% in the second quarter of this year to a total of 17.4 million shares, and at that time GM was the third largest position in the 13F portfolio (see more stocks Greenlight owned). Other hedge funds with large positions in GM at the end of June included $9 billion Taconic Capital and Jeffrey Tannenbaum's Fir Tree.
In early October, Einhorn re-committed to the GM long, naming it as one of his two favorite long ideas at the Value Investing Congress. Cigna (CI) was the other; he suggested short selling Green Mountain Coffee Roasters (GMCR) and Chipotle (CMG). He claimed- without a trace of irony- that GM's European operations would be profitable by around 2015; he pointed out that GM is a top seller in the Chinese market; he argued that U.S. consumers have built up a backlog of car demand.
On a quantitative basis, GM looks like a good value stock. Its trailing P/E is only 9, and Einhorn apparently has good company on the sell-side as earnings estimates imply a forward P/E of 6 and a five-year PEG ratio of 0.7. But let's take a look at the three geographies Einhorn mentioned. Sales in Europe were down 20% in the first half of 2012 compared to the same period in 2011, which drove negative EBIT (the margin was -5.4%). Obviously lower losses in Europe would improve GM's bottom line, but we wouldn't expect too much improvement from that market until the financial crisis has improved for good. The International division (which includes China) saw revenue increases but higher costs actually causes a 6% decline in division EBIT compared to the same period a year ago. It's therefore tough to see China as a growth driver as the country's economy likely grew faster over that period than it will in the coming year or so as investors look for a slowdown in the country. If the macro growth rate will be lower than it was in a period in which EBIT declined, then we won't count on getting earnings growth there either.
That brings us to the U.S. (or, more accurately, North America). The company's largest market by far experienced an improvement in revenues in the first half of 2012 compared to the first half of 2011, but actually saw a decline in Q2. Worldwide, and accounting for corporate level expenses, this meant that earnings were down 38% in the second quarter versus a year ago. And while the most recent U.S. data shows a pickup in sales, both in the month of September and year to date, that's been a factor that has affected the entire auto industry. In fact, GM's market share is declining: in the first nine months of 2011 it had 20.0% market share, in the first nine months of 2012 it had 18.1% market share, and in September it had 17.7% market share. Some of this fall is likely because market share was abnormally high in early 2011 due to the Fukushima incident in Japan, but the latest data is also a continuation of a long-term trend.
So, even if an investor believes in "the auto industry" there's no reason to necessarily pick GM as the instrument for that thesis. The company has consumer sentiment running against it thanks to the federal bailout (and, in some quarters, the emphasis on the Chevrolet Volt). Ford Motor Company (F) is also cheap at 7 times forward earnings estimates, and its sales growth so far this year beats GM's (though not in September, and Ford's Q2 was even worse than its peer). The company is also in better favor with anti-bailout types, for what that is worth. Toyota Motor Corporation (TM) has come roaring back from Fukushima and hit 14.5% U.S. market share in September, up from 11.5% a year earlier. Its forward P/E is 9 as more bad quarters from 2011 are worked out. Toyota has less European exposure than GM, and has suggested that its own operations there will be profitable this year. Its price premium over GM may be too low.
Investors might also consider tiremakers The Goodyear Tire & Rubber Company (GT) and Cooper Tire & Rubber Company (CTB). These are smaller-cap stocks, but still over $1 billion in market cap. Tiremakers have less upside from a strong recovery in auto sales, but aren't as dependent on it as consumers replace tires in older cars (a similar logic might apply for auto parts companies). Goodyear trades at a forward P/E of only 5 and a five-year PEG ratio of 0.1- extreme value if an investor trusts the Street, but the company carries a large debt load and faces worries about pension contributions. Still, compared to GM (which faces similar issues) it may be a better buy. Cooper Tire trades at six times forward earnings estimates, and has been increasing its revenue and earnings (Goodyear also saw strong improvement in earnings, though not in revenue, last quarter versus a year earlier).
We can see a case for GM, but any factors which benefit its business should also help Ford. In addition, tiremakers and Toyota seem considerably safer investments which are also good values based on earnings expectations.