GM Looking Promising Down the Road
April 22nd, 2014

I often talk about being patient when it comes to investing, but you may not understand what that means. Also, I hardly ever share recent buys in my portfolio, but to help you understand patience, I’m going to discuss a recent purchase.

I’m sure you have heard all the news about General Motors and the company’s current issues. I began looking at GM almost a year ago and we just began investing within the last week. While it is not one of our top holdings, we did take a good position in the company. I think it’s possible in the next 12 to 24 months that it could be one of our top holdings.

Let me explain what I wrote in my June 7, 2013, column and why I invested into GM now.

Last June, the stock traded right about current levels of $34. In December, the stock climbed to nearly $42 per share and has since fallen back to less than $34.

Back then, the stock had a PE of 11.7 and a forward PE of 7.8 based on December 2014 earnings per share of $4.39. The stock has a current PE of 14.3 but a forward PE of only 7.1, based on December 2015 earnings per share of $4.76. Price to book value has also improved for GM; it’s at 1.53, which is down from last year’s 1.60.

GM was not paying a dividend then, but I pointed out that with the company generating $10.6 billion a year in cash flow and sitting on $27 billion in cash, one could be coming soon. I’m happy to say GM now pays a 3.6 percent dividend, is sitting on $29 billion in cash and generated $13 billion in cash flow over the past 12 months.

Sales for GM have turned positive based on the trailing 12 months, checking in at 2.1 percent, compared with last year at a 0.3 percent decline.

The balance sheet for GM has changed quite a bit. Last year, GM had a current ratio of 1.3 and a debt to equity of 49 percent. Today things look a little different on the balance sheet. While the current ratio stands the same at 1.3, the debt to equity has increased to 85.0.

The reason for the debt increase is that GM bought Ally Finance in Europe and assumed about $13 billion in debt. What one won’t see is that GM also picked up $15 billion in receivables and, obviously, more business going forward from this investment. So after our in-depth analysis, I cheer the acquisition.

Last June, I wrote about GM’s profit margin being on the low side at 2.8 percent, compared with the industry average of 4.1 percent. But as of Dec. 31, financial statements have had a net profit margin of 3.4 percent.

The receivable turnover looks very good at 8.4 times over the past 12 months when compared with the industry average of 3.1. Inventory turnover looks good at 9.6, compared with a slightly higher 10.9 industry average.

What do I see going forward for GM? The company has received many awards for its cars, some of which are becoming top-rated and selling very well. If by December 2015 the PE multiple hits the average of 16.5, the stock could be trading at $78.54, a 131 percent gain not including the 3.6 percent dividend. If, however, the stock can only manage a PE of 10, the stock would trade at $48 a share for a 41 percent gain, not including the dividend.

I know you’re thinking I completely forgot about the current liability case against GM regarding the deaths of 13 people. I looked at that and the effects it could have on the company. I do feel bad for the people who lost their lives and GM is stepping up, already having put in reserves as much as $900 million to take care of this problem.

While I know this could be higher, maybe $1 billion to $3 billion, I also remember that GM has $29 billion in cash and generates $1 billion a month in cash flow.

I also remember cases against Merck, BP and Toyota who paid out some big money, and their stocks did very well after they fixed their issues. Not that it matters much, but GM doesn’t have a legal obligation to handle this case since they went through bankruptcy, which generally releases all prior claims and debt.

However, they are fulfilling their moral obligation to do the right thing. I have seen it brought out by Congress and others that GM ignored 113 complaints on the ignition system and, therefore, knew about the problem.

A couple of points here that people should be aware of: In running a business that sells millions of cars a year, 113 complaints is a percent that can’t even be seen. If GM or any company were to look at every little complaint in such detail, they would be broke in a very short time.

There is an organization that keeps track of automobile complaints, but it receives 40,000 complaints per year. There is just a limit for any business on how much it can do and it is very easy after the fact to say one should have done this or done that.

In the meantime, I’m aware that GM could drop in price maybe 10 to 15 percent. But I’m not trying to buy this company at the absolute bottom, because no one knows where that bottom is. What I’m doing is investing into a fundamentally strong company at a reasonable price that should provide a good return over the next 12 to 24 months.

Have a question or a company you'd like me to take a look at? Email me atbrent@wilseyassetmanagement.com.

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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