By Brian Tracz
General Motors (GM) has lost hedge funds a lot of money thus far in 2012. Todd Combs and Ted Wechsler, managers of two $4 billion kitties at Warren Buffett's Berkshire Hathaway, purchased 10 million shares at an average $25 a share in the first quarter. With shares at $19 a share, Berkshire Hathaway has lost 22 percent of its initial investment in less than 6 months.
The GM carnage doesn't stop there: David Einhorn's Greenlight Capital included GM in its top three holdings as of March 31. Einhorn lost a great deal in the first quarter on his initial investments in Marvell Technology (MRVL), though in July he took the opportunity to increase his position in the company at the cheaper price point. His gains from his Apple (AAPL) position--his largest holding as of March 31--have lessened the pain of the first two underperformers (view Einhorn's portfolio here).
We have previously noted that General Motors' price of 5.3 times consensus forward earnings might appear cheap but actually masks the bigger picture. The U.S. Treasury still owns 26 percent of the company, decreased from about 60 percent owing to the initial public offering that enabled General Motors to pay back $11 billion to the government. The Treasury is waiting to sell the remainder in the hopes of obtaining a better selling price. The debt situation is only part of the story. GM pension plans were underfunded by about $25.4 billion at the end of 2011, up from $22.2 billion at the end of 2010. In the near-term, GM's otherwise strong post-bankruptcy balance sheet will be eclipsed by these items.
That said, Einhorn said at his investor meeting in May that General Motors "is a misunderstood and very cheap stock." Excluding one-time expenditures, General Motors had first quarter 2012 earnings of $0.93 per share, beating the Street's estimate of $0.85 per share. That said, first quarter GAAP net income (including these one-time expenditures) was $1 billion, down from $3.2 billion in the first quarter 2011. Suppose we were looking to invest in the automotive industry. we might look at Ford (F) and say: "Very nice product mix, no huge debt anxieties, similar forward P/E of 6.7--we'll go with Ford."
Actually, we don't think the choice between the two would be that easy. Hedge funds look for events that catalyze undervaluations or overvaluations of companies. Take a recent example: on Monday, GM marketing chief Joel Ewanick submitted his (forced) resignation. The company cited lost market share around the world, and particularly in the United States and Europe, as the reason for his departure. (Earlier this year, the company's number one rank as an auto manufacturer was overtaken by Toyota (TM).) Now, analysts like Brett Hoselton, senior automotive analyst at KeyBanc Capital Markets, are saying, "You just can't have this level of turnover and expect to have a continuity of design, planning and strategy." He claims that the recent turnover of a number of top managers is "evidence of a lack of leadership at the organization."
I could imagine that, given his firm belief in the company's future, Einhorn is probably sitting back and enjoying the doom-and-gloom market sentiment. These ugly restructuring events could easily be viewed as signs of General Motors' steady recovery. The company has $37 billion in available liquidity as of March 2012, and its pension fund and debt issues are unlikely to paralyze the company. What these issues will do is artificially depress the price of GM shares for a while. General Motors is not a "get rich quick" stock--investors will need to wait for a more significant economic upturn and, ultimately, the sale of the Treasury's stake in the company before the value of the company is unlocked.
General Motors is reporting its second quarter earnings on August 2, and the consensus EPS estimate is $0.74.
Disclosure: I am long AAPL.