Following the Annual New York Value Investing Congress on October 3, 2012, General Motors (NYSE: GM) has become a popular topic for investors. David Einhorn, well-known President of value motivated hedge fund Greenlight Capital, tipped GM as one of his favorite picks. Einhorn stated he liked GM due to their healthy financial state and the fact GM had been able to significantly reduce their costs over the last two years. Einhorn told convention guests that he believed analysts were underestimating their calculation of a 10% CAGR over the next 5 years and expected GM could be debt free by 2015. Einhorn revealed he believes this is possible due to the company's new product lines, like the ATS Sedan, and expects this will help reverse GM's recent share loss. Not to mention, several other reviewers believe GM is still undervalued on the market and could eventually provide a decent return for investors.
Not all investors are convinced though. Several concerns have been raised about GM in recent months, including the fact that the company has large unfunded pension liabilities. However, GM has a cash-to-debt ratio of 2.3 and a significant cash reserve of US$32.61 billion. Other concerns include social unrest in South Africa that is causing production disruptions due to workers striking for a 22% wage increase, and recent drops in vehicle purchases throughout China and Europe. This is not an isolated GM issue though, competitors Ford (NYSE: F) and Toyota (NYSE: TM) are also feeling the effects of reduced sales in China and Europe and the employee strikes in South Africa. Not to mention, neither Ford nor Toyota appear to be in a position to eradicate their debt anytime soon. Both companies have a cash-to-debt ratio of just 0.4 and neither is seeing a significant increase in their cash reserves. However, compared to GM and Toyota, Ford is seeing a significant profit margin of 13.28%. Ford could potentially reduce their debt faster with a profit margin that is more inline with their industry.
However, despite varied beliefs about whether GM will be able to recover their former position prior to 2009 and fulfill Einhorn's predictions, they have certainly had an interesting year on the stock exchange. While the company has experienced two significant drops in value over the past 52 weeks, the company's stock has moved from 19 to the mid-twenties since July and is now back in the green with an overall return of +8.18%. Einhorn has seen a small return on this investment, but isn't the only investor to have a small win with GM already. Other investors like Mohnish Pabrai have also seen a return. In Pabrai's case, his portfolio has increased by +18.3% since his initial investment with GM.
All in all, with GM's new product lines and their plans to expand their position to a global scale as early as January 1st, 2013 with global Cadillac, GM may just be able to see a higher return than analysts expect. If Einhorn's predictions are correct, GM could potentially break even by 2015 with the cash to pay off their remaining debts to the United States and Canadian governments following their bailout in 2009. This could leave GM and investors with a decent return on their shares and better value overall on the stock exchange. But is all this all really possible for GM? It may be too early to say for sure, but Einhorn certainly thinks so.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Written by staff writer.