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Bud Labitan
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I am an author of books related to the decision framing and optimizing processes of Buffett and Munger. These books are available at www.frips.com and: http://www.amazon.com/Bud-Labitan/e/B002D1ERT4 With integrity and patience, we can also earn superior profits by carefully evaluating facts and... More
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Bud Labitan
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The Four Filters Invention of Warren Buffett and Charlie Munger
  • Does GM Make For An Intelligent Speculation? 1 comment
    May 18, 2012 9:59 AM | about stocks: GM, BRK.A

    Does GM make for an intelligent speculation?

    Since it is backed by the U.S. government, let's do a rough estimation. Starting with a base estimate of annual free cash flow at a value of approximately $3.3 billion and the number of shares outstanding at 1.57 billion shares, we used an assumed free cash flow annual growth of 6 percent for the first 10 years and assume zero growth from years 11 to 15. Review the free cash flow record here:

    http://quicktake.morningstar.com/stocknet/CashFlowRatios10.aspx?Country=USA&Symbol=GM&stocktab=keyratio

    The resulting estimated intrinsic value per share (discounted back to the present) is approximately $29.34.

    Market Price = $21.94
    Intrinsic Value = $29.34 (estimated)
    Price To Value (P/V) ratio = .75 and the estimated bargain = 25. percent.

    Before we make a purchase, we must decide (filter No. 1) if GM is a high quality business with good economics. Does GM have (filter No. 2) enduring competitive advantages, and does GM have (filter No. 3) honest and able management?

    Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is GM the best place to invest our money today? I do not think so. However, since Mr. Combs' and Mr. Weschler's compensation is based on three-year performance, I think this was a bet made by one of them and approved by Mr. Buffett.

    I agree with Dr. Maulik Suthar's take on an upswing in a cyclical industry and consideration of a leaner GM backed by the US. I posted some ideas at the Facebook ISVI site, and Idea #5 is to look at this interesting play as an "insurance policy" on Buffett's bet that the US economic recovery continues. While $500+ million is a mini stimulus on one business, GM, it also carries the weight of Buffett and Berkshire's reputation... more upside than downside. So, should we reframe and think of GM as a multinational company with a profitable primary market in China and semi-profitable secondary markets in the US and other parts of the world? Obviously they see value there that we do not yet see.

    I can see GM doing well for the next three to four years as a restructured entity. I do not yet see any long-term competitive advantages at GM.

    Bud Labitan
    author of "The Four Filters Invention of Warren Buffett & Charlie Munger" and "Moats"

    Disclosure: I am long BRK.A, BRK.B.

    Themes: intelligent speculation Stocks: GM, BRK.A
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  • How did you come up with $3.3 billion annual starting FCF? GM turned a large profit last quarter. It is exceedingly difficult to use ttm net income go calculate FCF because you are averaging in losses with a large recent profit.

     

    Please advise what discounting rate you used and why you chose it.
    8 Jun 2012, 02:45 PM Reply Like
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