Thursday, January 31, 2013

A Low Risk Bet for the Long Term

General Motors (NYSE: GM), one of the biggest US corporations, received substantial funding from the government during the crisis in 2009. GM had been quite vulnerable with pension liabilities that were even higher than its total market capitalization before the bailout. At that time, the US Government provided support with as much as $49.5 billion in the bailout package. Recently, the Treasury Department said that it planned for its exit by selling its remaining position if GM in the open market in the next 12 to 15 months. GM announced that it would buy 200 million shares at the price of $27.50 per share, with the total transaction worth of $5.5 billion. That will likely be beneficial for this formerly proud American automobile company. 
Taxpayers' money will likely face losses
Out of total $49.5 billion in US government bailout package, GM has paid back $23.1 billion in 2010 including: (1) $6.7 billion and $800 million in dividend and interest on loans and preferred stock, (2) $13.5 billion from GM’s initial public offering, (3), $2.1 billion preferred stock buyback from the government. Thus, the remaining amount is around $26.4 billion unpaid. Currently, US government still owns 32% of the company, or around 500 million shares. Even with the significant daily jump of 8% to close at $27.18 per share, those 500 million shares owned by the US government would be worth nearly $13.6 billion, so the leaves the gap of $12.8 billion for taxpayers’ money. With $5.5 billion to repurchase by GM, the remaining 300 shares need to be sold at $70 per share to be breakeven on the investment bailout money.
A Much Stronger GM
GM is much stronger than it was before. To operate more efficiently, the company has exited several brands, including Hummer, Saturn, and Saab. In North America, there are only four remaining brands; Buick, Cadillac, Chevrolet, and GMC. As of September, it boasted nearly $42.7 billion in total shareholders’ equity, more than $33.7 billion in cash and short-term investmenst, only $10.37 and $6.28 billion in long term and short-term debt, and $32 billion in pensions and other benefits. With a current price of $27.18 per share, the market cap is around $42.56 billion, and the enterprise value is only $24.65 billion. David Einhorn was bullish about this car manufacturer because of the cost reduction and manageable pensions. He said that GM had a huge tax shield, $70 billion, that will effectively save the company from paying US taxes for a decade.
Market Leader and Valued Cheapest
In the first three quarters this year, GM was still the leading US automobile manufacturer with a 18.1% market share. Ford (NYSE: F) ranked the second with a 15.5% market share. The third position belonged to Toyota (NYSE: TM), with a 14.4% share of the market. China and the US are still the two main countries providing the majority of GM’s sales, of 2.54 million vehicles and 2.5 million vehicles respectively. Valuation-wise, GM is extremely cheap compared to its peers. Its EV/EBITDA ratio is only nearly 2x, whereas the EV multiples of Ford and Toyota are 10.42x and 8.22x respectively. In the third and last quarter of the year, the Chairman and CEO, Daniel Akerson and a director, Thomas Schoewe have purchased nearly 29,000 shares at an average price of $20.35 and $25.95 per share, with the total transaction worth of more than $600,000. 
My Foolish Take
The new GM is so cheap, and when it can buy back the shares below the government purchasing prices, it will create more value for its existing shareholders. In addition, a lot of other famous investors have been accumulating GM shares including David Einhorn, Monish Pabrai, and even Warren Buffett through Berkshire Hathaway.  It is a relatively low risk bet for the long-term. 

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