Why Warren Buffett Is Buying GM Now

| About: General Motors (GM)
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General Motors (NYSE:GM) is roaring back from its recent bankruptcy. In SEC filings, Berkshire Hathaway (NYSE:BRK.A) disclosed that it owns 10 million shares of General Motors. I think chances of GM stock going up are clearly better given that the "Oracle of Omaha" recently purchased 10 million shares. In addition, GM is introducing a handful of new models that are competitively priced compared to Japanese and Korean models. Due to the government bail-outs and subsidies, GM is able to position them well and I expect consumers will buy them. Finally, GM has little exposure to Europe, compared to its cousin Ford (NYSE:F) and I guesstimate even smaller exposure to the south European countries that are experiencing the harshest economic realities.

I think that Warren Buffett and his investment conglomerate are hungry for returns as in recent years Berkshire Hathaway has been underperforming the S&P 500. Berkshire stock is up 6% in the first quarter of 2012 compared to a gain of about 12% for the S&P 500. In addition in 2010 and 2009 Berkshire Hathaway stock underperformed the S&P 500 by 2.1% and 6.7%, respectively. In 2011, it outperformed the S&P 500 by a slim margin of 2.5%. These are not good results for someone who is considered by many the greatest investor of our time. In my opinion, in this uncertain economic environment Berkshire and its newly hired investment brains will try to outperform the market with minimal risk and GM is the right company for this. No other company is more loved by both presidential candidates - Romney and Obama.

What makes me even more excited and optimistic about General Motors is that it is introducing a handful of new models that I believe will drive sales and profits in 2012 and 2013. A few models that catch my attention are the Volt, the Chevy Cruze Wagon, Buick Regal with eAssist, the 2014 Impala, and the 2013 Sonic RS. Detroit and GM specifically needs to prove to the consumer that it can deliver superior products at acceptable prices and then start thinking about its profit margins. Chevy is positioning itself to regain this trust with its new models that have been introduced on the market or will be soon.

Starting with the Volt. We have been hearing about the Volt coming to market since it was first announced in 2007. Finally, it hit the dealerships in early 2011 only to be followed by a near-recall caused by the Volt's battery catching fire. Overall, I believe that the Volt has a good future in front of it as gas is near $4 a gallon, depending on the state you live in. In addition, the Volt's price starts at about $32,000 not including tax incentives which compares favorably to another plug-in car, Nissan LEAF, which starts at about $36,000. Estimates put the government subsidies for the Volt at about $250,000 per car. It appears that consumers are buying a car worth close to $300,000 for a fraction of its cost. In addition, Volt is expected to become profitable for GM soon because it is being accepted well around the world.

Chevrolet is trying to enter the compact and medium-size category cars with the introduction of some models that I think will sell well here and abroad. First is Sonic RS which is a sports version of the already well accepted Sonic. I think this car will appeal to everyone with its good gas mileage, handling of the road, and price tag of under $20,000. For comparison, the other sporty subcompact cars are mostly made by German carmakers and include VW GTI (starting at $24,000), BMW 1 (starting at $31,000), and Audi 3 (starting at $27,000).

Another compact car is the Chevy Cruze Wagon that will be introduced first in Europe and then in the U.S. sometimes in 2014. In my opinion, there is an already established market for wagons in Europe and the U.S. is warming up to the idea of replacing the SUV with a more efficient wagon. Lastly, Chevy has already introduce the full-size 2014 Impala which should gain market share from the Toyota (NYSE:TM) Camry and Honda (NYSE:HMC) Accord. All these three models include GM's MyLink system which offers high-technology such as Pandora radio in the car via a touch interface and roadside assistance, making spare tire an optional feature. GM's more expensive and profitable brand Buick, will introduce the Buick Regal in 2013 which will feature the eAssist system which is basically a hybrid system that improves substantially fuel economy without sacrificing performance.

GM recently announced that it is moving its European car manufacturing to only two plants - one in the U.K. and the other one in Poland and closing its German manufacturing operations. The Western and Central European regions represented 19.2% of company-wide sales compared to 28.2% for China. Earnings before interest and tax (EBIT) were $(747) million for Europe in 2011. This was an improvement from 2010 when EBIT were almost $(2) billion. For comparison, Europe represented 26.4% of Ford's sales in 2011 while Asia Pacific was 6.6% of sales. Clearly, Ford is more dependent on Europe than GM. In fact, it will be difficult for GM's situation to get worse in Europe and I believe its recent restructuring there will bear fruit in 2013.

Overall, GM stock is fairly valued and I believe it offers larger upside than downside potential. How many times can you go into a bankruptcy in one decade? I do not think there is a risk of bankruptcy and currently the shares trade at a price to earnings ratio of 6 compared to a price to earnings ratio of 13 for the S&P 500. In addition, there are a number of catalysts that can drive the share price up, including an increase of Warren Buffett's recent investment in the company, a handful of well-priced new models with attractive features that will be offered in revamped dealerships soon, and a low exposure to the economically challenged Europe.

Warren Buffett is not a day trader and he invests for the long-term. I believe following his footsteps and investing with the largest US car maker and the second largest car seller in China makes a lot of sense. General Motors is not a company with a short history, such as Facebook (NASDAQ:FB), and I have a lot of confidence in this iconic brand.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.