2014 promises to be an important year for the battered and bruised General Motors. That’s because the federal government is finally winding down its taxpayer investment in the company completely over the next month. The Treasury Department will be selling 31 million shares over the last month of the year – possibly driving down prices in the short run as the sales overwhelm demand, And yes, the taxpayer is taking a $10 billion bath on the bailout of the auto manufacturer.
That’s important, because it means that the American automotive behemoth will once again finally be entirely in private hands. Essentially, the sale of the government’s position means that the GM Board of Directors finally has freedom of action: It can pay its executives whatever it likes, for example. The company had been complaining that government-imposed executive pay constraints made it difficult for them to compete for the best talent.
Of more direct concern for shareholders, though, is that the company now has freedom of action to do whatever it wants with the $27 billion in cash it has amassed over the last five years. The company has not paid a dividend since 2008.
One of the unknowns is the extent to which the “Government Motors” stigma biases investors and perhaps unfairly depresses demand for the company’s securities. However, a company like GM typically has strong institutional interest. While there is a vocal minority of individuals who will never forgive GM for taking a government bailout, these people likely aren’t overseeing large portfolios. The professionals must look at the numbers.
First of all, the rear view mirror tells a nice story: GM stock has revved up over 80 percent over the past two years or so, now sitting at $41.10 as of this writing. I don’t drive looking in the rear-view mirror, though, so let’s look at some value numbers, which I’m pulling from Morningstar:
The current trailing twelve month P/E on the stock is 12.2, based on $3.29 per share earnings, also over the trailing twelve months. That puts the company at a slight discount to the other major auto manufacturers, at 13.3 times earnings, and at a significant discount to the S&P 500, overall, which trades at 17.9 times earnings. Using forward earnings estimates, the stock’s trading at about 7.2 times earnings, putting it at a significant discount to the S&P 500, of which it is such an important component.
Although the company has not paid a dividend in many years, its internal fundamentals support an earnings yield of 8.2 percent. That includes a substantial recent boost in capital spending, which we see as a very positive sign.
Furthermore, the $41.10 stock price includes about $19 in cash per share, which makes the company even cheaper – you pick up an awful lot of manufacturing capacity and earnings potential for the remaining half of the share price… along with the cash. Back the cash out of the price per share and your P/E ratio looks a lot less like 7x and a lot more like 3.6x
We anticipate that the GM board of directors will be looking to cut a nice dividend very soon after the government fully exits its position.
Taking a broader view, a big future catalyst for GM’s future growth lies in its Asia/Pacific operations, under the GM International Operations subsidiary, or GMIO. Asia is not the rocket ship of growth it was a couple of years ago, thanks to a slowdown in China. But China’s emerging middle class has a lot of headroom to grow and China’s government, long hamstrung by the prodigious savings rate of the average Chinese family, is actively looking boost domestic consumption.
According to the World Bank, the East Asia/Pacific region is still the “engine driving the global economy,” responsible for 40 percent of the GDP growth on the entire planet.
GM has a nice head start in China – the nuclear reactor core of that engine of economic growth, where, even after a carefully-engineered economic slowdown, the World Bank still forecasts economic growth of 7.7 percent in 2014 – a figure that dwarfs even great years in the United States and Europe. GMIO accounts for about $2.2 billion of the $8.4 billion in earnings before interest and taxes that the company posted in 2012.
GM moves nearly as many cars in China as it does in the United States, and just posted a record November in China with sales growth of over 13 percent. The Chinese bought more cars than Americans in 2009 and the Chinese auto industry is expected to double by 2019, according to reporting by Agence France-Presse.
Meanwhile, Europe, still struggling through the sovereign debt crisis, a crisis of faith in the euro, and a slip into recession, actually cost the company 1.8 billion in losses in 2012. However, the quarterly numbers released over this year indicate that the European economy is recovering substantially.
With a low starting price point from a valuation perspective, the substantial cash on hand per share, strong growth in China and the Pacific Rim, a recovery bringing back the GM Europe operation back to profitability, and with the 800 pound government monkey finally getting off the company’s back, the weak link in Europe on the way to recovery, General Motors is perched on multiple powerful catalysts that can propel them to index-beating returns in 2014. With the S&P 500 itself feeling pretty frothy these days, GM seems to represent a compelling old-fashioned value play.
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