It seemed unthinkable at the time, but the writing was on the
General Motors (
filed forbankruptcy protection, becoming the fourth-largest
bankruptcy in U.S. history. The company only had $82.29 billion in
assets to cover its $172.81 billion debt.
Even an almost $30 billion bailout by the federal government
couldn't save the doomed car maker, and plans were made for heavy
factory closings and the loss of more than 20,000 jobs.
Fast-forward to today, and renowned investors like David
Einhorn, president ofhedge fund Greenlight Capital, are touting GM
as one of their topstock picks for 2013.
What gives? And more important, should you follow suit?
Let's start with the good news…
GM is trading for bargain prices
In Novemeber 2010, the restructured automaker pulled off the
biggestIPO in U.S. history, raising $20.1 billion through the sale
of 478 million commonshares at $33 each. By June 2012, shares had
dipped below the $20 range for the first time since the IPO. It
finally hit bottom in July, at just below $19 per share.
Since then, shares have been on the rise. Fueled by strong 2012
third-quarter earnings report, in whichnet revenue rose by $1
billion, shares finally broke through resistance at $28. Since
July's bottom, they've gained more than 50% and recently topped the
$30-mark before taking a breather.
Yet, even after the rise, when compared to earnings, the stock
is still inexpensive.
GM's forward price-to-earnings (P/E ) ratio, which is used to
compare a company's current share price to its expected per-share
earnings, is just a little more than 5.
That's an incredibly low price for a company that owns iconic
brands such as Cadillac and Chevrolet.
U.S. car and truck sales are on the rise
U.S. new car and truck sales rose to a four-and-a-half year high in
2012, with more than 14.5 million units sold. Industryinsiders are
predicting 2013will be even better, with sales climbing to 15.5
million units this year, according to automotive forecasting firm
As you might expect, with rising sales, GM'srevenue has grown
steadily the past three years from $104 billion in 2009 to more
than $150 billion last year.
But what's even more telling is the change in GM'sfree cash flow
Free cash flow is a measure of how muchcash a business generates
afteraccounting for capital expenditures, such as buildings or
equipment. This cash can be used for expansion, dividends, reducing
debt or other purposes.
In 2009, the company reported a negativecash flow balance of
more than $22 billion dollars, as the cost of restructuring and
paying off debt destroyed thebottom line .
Although last year the numbers trailed the previous year, GM
still posted almost $2 billion in free cash flow. This is a good
sign that the company is on a solid footing and could even begin
paying adividend if profitability continues to rise.
GM is far more diversified than most investors
GM, a brand synonymous with American workmanship, actually sells
nearly 70% of its vehicles outside North America.
The company is already is a top player inemerging markets ,
particularly the so-called BRIC nations -- Brazil, Russia, India,
GM's Chevrolet is currently the world's fastest-growing
automotive brand. Chevrolet sold almost 5 million vehicles in 2012,
setting a new global sales record for the company.
Now that we know the good news, let's take a look at some of the
reasons investors are still wary of GM...
GM has undergone considerable restructuring since its bankruptcy
and bailout. So in many ways, it would be unfair to judge current
management's capabilities based on the old management's
Still, the company has already had three different CEOs at the
helm since 2009. Two-thirds of its board members are new, and there
are questions as to how much experience the new leaders have in the
automotive industry. For example, Dan Ackerson, the company's
latestCEO , is a veteran of the telecommunications industry and
worked with Carlyle Group before coming to GM.
While I believe GM definitely needed major restructuring,
investors tend to get jittery when a company's top brass play
musical chairs too often.
One positivenote to consider: GM'sboard of directors voted to
buy back 200 million of the U.S. Treasury's 500 million shares last
December. They realized the stock wasundervalued and acted
accordingly. This is the kind of action investors like to see, and
I would keep an eye out for similar actions in the future.
Trouble in Europe
Despite the recent success in North America and in developing
nations, GM's European division is still having trouble. The
division is losing $1 billion per year and Stephen Girsky, the vice
chairman in charge of fixing the problem, has predicted this
division will not break even until mid-decade.
To be fair, part of the reason for that division's slump is
systemic -- European car sales have recently fallen to their lowest
levels in almost 20 years, because of the eurozone economic
Action to Take-->
If you are acontrarian investor who revels in beaten-downstocks
that are in an upturn, then GM is a great "buy" at current levels.
If you are the type of investor willing to be patient while
management proves itself and the auto industry continues its
rebound, then GM is worth further research.
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