Analysis of the General Motors Corporation
Report by 3one2.com Analysts: Jasmine Chu, Austin J. Lee, Timothy Schmidt, Jen Wayman Investment Recommendation: MARKET OUTPERFORM
GM - NYSE (2/17/00) 52 week range Revenue Market Capitalization Share Outstanding Dividend Yield Avg. Daily Trading Volume Book Value per Share (12/99) Return of Equity Est. 5 Years EPS Growth Rate $74 ¼ $59 ¾ - $94 7/8 $143.01B $47.22B 640.2M 2.7% 3.48M $21.33 36.2% 8.09%
February 20, 2000
Dow Jones Industrial Average (2/17/00) Standard & Poor 500 Index (2/17/00) EPS Forecast FYE 12/30 EPS Ratios Forward P/E Forward PEG M/B P/S
1998A 1999A 2000E 2001E 4.18 8.52 8.93 10.42 GM 8.29 1.10 3.48 0.33 Average of Competitors 17.91 1.68 2.12 0.39
Performance of GM Trailing Actual Return Relative to S&P 500 Relative to Competitors
6 mo 15.2% 10.3% 19.5%
12 mo -11.8% -21.8% -16.0%
24 mo 14.7% -21.5% -15.5%
Industry: Automobile & Truck Manufacturing
Valuation Predictions Actual Current Price P/E Valuation PEG Valuation M/B Valuation EBO Valuation DCF Valuation
$74 ¼ $159.97 $71.44 $45.22 $53.25 $101.84
General Motors Corporation is the number one auto manufacturer in the world. Stock price has grown consistently, tripling in value over past five years. Goal of 10% market share in Asia has led to increased stake of 10% in Isuzu and Suzuki. Potential for growth in international auto markets outweighs any losses in domestic market share. Increase in Net Revenues due to higher profitability of new product lines.
Rating System: BUY: A strong purchase recommendation with above average long-term growth potential. MARKET OUTPERFORM: A purchase recommendation that is expected to marginally outperform the return of the market. MARKET PERFORMED: A recommendation to maintain current positions with returns to match that of the market. SELL: A recommendation to sell the security (or short the security) as it is expected to decrease in price in the medium term.
General Motors Corporation is a full-time vehicle manufacturer, has financing and insurance operations, and also manufactures products and provides services in other industries. General Motors domestic brands include Buick, Chevrolet, Cadillac, GMC, Oldsmobile, Pontiac, and Saturn. Other sources of revenue derive from the General Motors financing branch, GMAC, which provides financial services, including financing, leasing, extended service contracts, residential and commercial mortgage services, and vehicle and homeowners insurance. Other non-automotive operations include subsidiaries such as Hughes Electronics, which deals with satellites and communications, Allison Transmission, and General Motors Locomotive, which deals with diesel engines and locomotives. Competitive Situation
North American Auto Market 1997
North American Auto Market 1999
GM Ford Daimler Chrysler Toyota Honda Hyundai
Growth Opportunities They realize the stagnant growth of car sales and population in North America, so are attempting to increase sales in Latin America and Asia, two rapidly growing areas. General Motors has joined alliances with Asian companies to facilitate the transition into the Asian sector. General Motors is expecting crossover vehicles to take the market by storm in the next ten years. They are similar to sport utility vehicles, but are smaller and less expensive.
They are investing heavily on alternate propulsion systems, spending 500 million dollars annually, which include electric automobiles, fuel cells, and diesel engines. GM is attempting to fully utilize the internet; they figure that a good portion of sales in the future will take place on the internet, but normal dealers will still be necessary. They are also attempting to perform after-market service on all automobiles sold, such as tire stores and oil change stations, to maintain loyal customers Finally, General Motors is looking into various in-vehicle communications and entertainment, such as utilizing the internet while driving. Risks
The most blatant concern is the trouble with labor relations. GM has the most employees for their volume of production. Because of high-demanding unions, General Motors has severe difficulty when attempting to downsize. These higher labor costs have led to diminished profits.
GM is also concerned about the growing share of Asian manufacturers. They have much lower labor costs and are thus able to sell quality vehicles at affordable prices. Hyundai, a Korean manufacturer, has only a one- percent market share in the North American market, but they are growing the most quickly with their inexpensive cars.
Uncertainty also exists with the internet. Whichever car manufacturer is able to fully utilize the internet first will have a huge advantage, but setting up the wrong process or going in the wrong direction can cost GM hundreds of millions of dollars.
The majority of General Motors’ products are sold to the older population in North America. They must try to make their products more attractive to the younger generation.
Financial Information Revenues have increased on average 5% annually over the past 5 years to $177B in 1999. Net Income has increased on average 4% annually over the past 5 years to $5.6B in 1999. Net Margin has remained constant at 3.3% annually for the past 5 years, well below GM’s current goal of 5%. Currently GM’s Return on Assets(ROA) is 2.3% and GM’s Return on Equity(ROE) is 36.2%.
Calculations for Forward P/E and PEG Valuation:
Price General Motors Ford Daimler Chrysler Toyota Honda Average 74.25 43.375 62.875 84.375 69.5625 Earning (X1) 8.93 5.95 6.5 2.05 5.14 LT Growth Rate Forward P/E 8 780.00% 10.1 NA 4.3 8.29 7.29 9.67 41.16 13.53 17.91 Forward PEG 1.016 0.93 0.96 NA 3.15 1.68
P (using P/E)= Average Forward P/E ratio of Competitors * Earnings (X1) of GM = 17.91 * 8.93 = 159.97
P (Using PEG)= Earnings of GM * Long Term Growth Rate 71.44 = 8.93 * 8 = The reason GM, Ford and Daimler Chrysler have relatively similar Forward P/E ratios is because the market in the United States is fairly saturated for the automobile industry. On the other hand, high Forward P/E ratio of Toyota might indicate a fast growth opportunity in the future, since Toyota is a strong competitor in the international market. Calculation for M/B Valuation:
M/B Ratio P/S Ratio 0.33 0.34 0.42 1.48 0.67 0.73
General Motors Ford Daimler Chrysler Toyota Honda Average
3.48 2.08 1.8 2.56 2.02 2.12
P= Average M/B Ration of Competitors * BV0 of GM = 2.12 * 21.33 = 45.22
GM has relatively high M/B ratio compared to the other competitors, probably due to its strong customer loyalty and the well-known brand name.
A value of $51.56 per share was derived from EBO Valuation An EBO Model assuming a 5-year "growth" period and abnormal earnings revert to zero after year 7. The following assumptions were used: EPS Forecasts: One year ahead EPS figures were gathered by averaging Finance Yahoo reports ($8.93) Two year ahead EPS figures were gathered by averaging Finance Yahoo reports ($10.42) Long Term Growth Rate: The Five Year Growth Rate from Finance Yahoo = 8% Book Value per Share: Book Value per Share from Hoover's Online report = $21.33
Calculation of EBO Valuation:
G = 8% R = 12% Xn = Xn-1 * (1+G) BVn = BVn-1 + (Xn-1 - Dividend)
Earnings Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 8.93 10.42 11.25 12.15 13.12 14.17 15.30 16.52 Book Value (BV) 21.33 28.26 36.68 45.93 56.08 67.20 79.37 92.67 Disc. Ab. E 21.33 5.57 5.44 4.68 4.00 3.39 2.85 2.36 1.92
Note: Please see CAPM calculation under DCF Analysis
Price Using EBO Valuation
Growth Rate 5% 80.00 65.03 49.96 38.92 30.72
EBO Sensitivity Analysis:
5% 8% 12.0% 16% 20% 8% 85.51 69.43 53.25 41.40 32.61 12% 93.73 75.99 58.15 45.10 35.44
Cost of Capital
In the EBO and DCF Sensitivity Analysis, the prices of stock obtained from both valuations are more sensitive to cost of capital than the growth rate. In addition, with relatively high M/B ratio, this indicates that the market in the United States is saturated, therefore the growth Opportunity is limited. However, General Motors can prosper by expanding to the International market
DCF Valuation: A value of $101.84 per share was derived as a fundamental value for GM common stock. The following assumptions were used to calculate GM’s appropriate discount rate: CAPM: Ra = Rf + β * (Rm – Rf) where Rf = current yield on a U.S. Treasury Bill = 5.47% β = Beta for GM = 1.00 Rm = our estimation of the current return on the market = 12% So, Ra = Rf + β * (Rm – Rf) = 5.47% + 1.00 * (12% - 5.47%) = 12% Thus, we used 12% as the discount rate for DCF Valuation. Additionally, we used a constant growth rate of 8% annually over the next five years. DCF Valuation Sensitivity Analysis: Growth Rate
5% 101.69 96.53 89.54 79.56 8% 107.39 101.84 94.32 83.61 10% $ 111.36 $ $ $ 105.54 97.65 86.43 15% $ 121.96 $ $ $ 115.39 106.52 93.92
$ $ $ $
$ $ $ $
12% 15% 20%
DCF Valuation: P = (CF*(1+g)t-1)/(1+r)t, where CF = Cash Flow, g = constant growth rate, r = discount rate, and t = year We arrived at a cash flow figure of $24.5 from Hoover's On-Line Financial Data, "Cash Flow Per Share." To perform the sensitivity analysis, we found the appropriate CAPM discount rate when the market return was 10%, 12%, 15%, and 20%. Then, we used growth rates of 5%, 8%, 10%, and 15% in the DCF Valuation for each of the differing discount rates. We assume future cash flows to be a growing perpetuity after the fifth year, with a growth rate of 8% per year.