S. Hilgemann

Deep value, long/short equity
S. Hilgemann
Deep value, long/short equity
Contributor since: 2012
The tax incentive lasts till December 2016, i.e. a whole 12 months +
Yes that is correct. People forget that a) the population is larger now and b) wealth per person / household is higher so they can afford more cars. This leads to the next peak in US SAAR likely being higher than previous ones.
That comment made my morning! Hadn't heard of that quote/saying before, fully agree with it.
This year's estimated earnings are ~$4.50, next twelve months' earnings are ~$4.80, next year's estimated earnings are ~$5.30.
Therefore P/E ratios are: 2015 P/E of ~6.9x, Next twelve months forward P/E of ~6.4x, 2016 forward P/E of ~5.9x.
Thanks. I will update this after Q2 earnings, stay tuned.
The deferred tax assets have no impact on the tax rate on an income statement. The taxes that I calculated are used to decrease the deferred tax asset where possible, and thus the actual cash taxes paid are indeed much, much lower. The benefit of that flows through the cashflow statement, however, and not the income statement. 35% is generally GM management's guidance for the tax rate, with some variations around that, e.g. This year the rate will likely be somewhat lower, closer to 34%.
I think we can expect a few good years yet, US car market fundamentals are pretty strong when you look at the average age of the fleet in current operation, number of cars in operation per household, number of cars sold per capita, there's plenty of room to continue. When people look at SAAR 17m they often compare that to past peaks, but what they forget is that the total US population has grown quite a bit since then. E.g. in 1990 the US population was around 250 million people, today there are around 320 million out there. Also, the Fed is just beginning to hike rates at the end of the year, and it'll take them at least two years to finish that cycle. In the meantime emerging markets (GMSA, GMIO) will have recovered, Europe will come into its own stride, and all three regions will be meaningful contributors to GM's bottom line.
Also, based on current consensus estimates the 1y forward P/E ratios are:
F - Ford - 2016 EPS $1.89 - P/E of 7.95x
GM - General Motors - 2016 EPS $5.16 - P/E of 6.44x
That's a big difference in valuation..
Note to author: Currently GM's dividend is 4.33% ($1.44 divided by $33.23), while Ford's is 3.99% ($0.60 divided by $15.02).
Welcome to the internet, where news is just copied and pasted by people who know nothing..... lol
Have you checked whether they sold common stock in order to recycle the proceeds into series B warrants and call options? I doubt any of them were net sellers in 2014/15, but actually increased their positions when you take the warrants and options into account.
Best piece of advice by a mile in this article is this: "Narratives are not reliable tools for investing. Avoid thinking in narratives." - If only people listened!
GS raised their target from $46 to $48..
Very well written article - thanks for that!
As opposed to a passionate analysis? When it comes to investing I'm well served leaving emotions and passion to one side and focusing on hard facts and numbers. That doesn't mean I have no passion for people in tragic accidents, that passion simply doesn't belong in a financial analysis.
Duly noted, of course I'm aware of the PR sensitivity around this issue. But shortly after an investigation and the establishment of a compensation fund for the victims' families, this should be the very next thing to think about for the Board.
GM could do all of the above and initiate a repurchase program and still be overcapitalized given the company's strong cash flow generation. When all is said and done the recall might end up costing $3bn+ in a worst case, but note that in Toyota's case it took 4 years to come to a settlement of $1.2bn on the legal challenges. I.e. none of this threatens the near-term liquidity of GM, they don't call it a 'fortress balance sheet' for nothing. In four years from now GM will likely have earned more than $20bn (perhaps even more than $25bn), and yet a potential legal battle that may cost them $1.2bn sometime in the future is deemed dangerous to the company's liquidity? Surely not, especially given the $33bn in cash on the balance sheet and additional free cash flow being added each quarter.
The opportunity to buy back your own stock at fire-sale prices is something that great managers should seize upon. GM would be well advised to recognize this opportunity and act sooner rather than later.
Good question, I think you're spot on there, mid cycle around $5 eps sounds reasonable to me too. Peak cycle could be as high as $7-10 eps, depending on how efficient they can make GM over the coming years (margins, margins, margins!). In a 2008-like crash I'd currently see about break-even, excluding restructuring costs. So that's the big short-term whammy to watch out for over the coming decade. It's still a hyper-cyclical stock, so it's important to keep that in mind.
My rough target numbers of $48-52 are for Dec 2014, i.e. slightly less than 12 months from now. Don't forget the 3% dividend on top, which you can currently reinvest to compound a little quicker while the stock trades far below fair value. Once the stock trades in the 50s it'll likely be less attractive to reinvest the dividend. Personally I'm just converting the dividend payments into 2019 B warrants, I feel comfortable with those because the expiry date is so far out that I can have a high confidence in saying that the stock will be higher by then.
Fair value in my mind would be 10x forward earnings plus the DTA, so as of year end I'd say about $50-54 plus 8, i.e. $58-62. I doubt it will be fairly valued by then though, so $48-52 is probably a fairly conservative and achievable range to target.
Yes, every quarter the DTA turns into cash on the balance sheet, and part of it is being paid out as a dividend, parts are spent on capex and better products, and parts of it will undoubtedly be available for buy-backs in the second half of 2014 or first half of 2015. The Canadian stake you mention is 'for sale' but I remember them stating that they want a 'fair price' and that GM currently is too cheap to sell. So perhaps close to $45 to $50 they can be convinced to sell.
Undervaluation never makes sense, it always appears crazy, and investors have to be willing to look silly for a while. Eventually it'll correct itself, who knows when. I'd guess by 2015/16.
Yes I like the warrants, but you must be mindful of the fact that they introduce leverage, which may or may not be appropriate for your portfolio. Also the liquidity is limited (for large institutional investors this matters, to private investors it doesn't), and they are simply harder to buy for average Joe since not all brokerage accounts will allow you to trade them. If you can get access to them, then I'd mix them into a core stock holding.
Finally someone who writes some sense about Best Buy. The rampant negativity in the media and financial community has led to a company so cheap its minority owner wants to take it private (I'd do the same at that price!). You are a better analyst than those guys at Jeffries who think the bid is "too low", yet rate the stock "hold" with a target of $21. Laughable. Either this company will be taken over in the 30s, or we'll sit here in 2015-17 with a public stock that will be much higher than that. Win-win for investors, but don't tell that to all those news-reading, analyst-opinion-abiding speculators.
More buyers who desire to purchase, less sellers who desire to sell. Of course the trades would match up, but the bid/offer jumps would be upward with more bids in the market than offers. Extreme example, 10 buyers at 50, 1 seller at 51, 1 seller at 52, 1 seller at 53 .. etc.. all the way to 60. 10 buyers and 10 sellers, but the price moves up.
More buyers than sellers perhaps? Daily movements are perhaps more like a random walk? Stocks are fundamentally cheap, it doesn't take too much to move them higher? So many explanations for those who don't seek to find the cause of a move in every headline they read ;)
I've written a response to this article here on SeekingAlpha: http://seekingalpha.co...
A response to this article here on SeekingAlpha: http://seekingalpha.co...