General Motors Corp

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					General Motors Corp. (GM)                                                                Benjamin Salo
Date:                          February 16, 2006         Consensus Estimate 09/05A 12/06E 03/07E
Sector:                        Consumer Goods            EPS                    $-5.79   $-0.16     $2.33
Industry:                     Automobiles & Parts        P/E                     NM       NM         9.44
Current Price:                       $21.98              Long Term Growth Rate:                5.21%
52 Wk Price Range:               $37.70-$18.33           Ratio Analysis    Co.    Indus.   Sector SP500
Ave. Daily Vol:                   10,848,490             P/E (TTM)         NM     31.08    31.45     20.77
Beta:                                 1.22               P/S (TTM)        0.06     6.56     5.49      2.91
Market Cap ($million):              $12,430              P/B (MRQ)        0.74     6.15     5.59      4.05
Shares Out (million):                565.5               ROA (TTM)        -1.92    2.22     7.63      7.94
Inst. Hold %:                        77.0%               EBO Valuation                               $13.02
Div Yld:                             4.60%               Recommendation:                              Hold
Total Debt/Equity:                  12.41%               Stop-loss Price:                            $18.00
Member S&P 500?                       Yes                                  Price     6-mo prob    12-mo prob
                                                         Target Price     $26.50       53%           64%

                Investment Thesis                                                 Summary
      General Motors EBO valuation is only 58%            Fundamental Valuation:
       of their current price, indicating the stock is         Negative: The EBO valuation was $13.02 using a
       overvalued.                                             discount rate of 9.85%, suggesting the stock is
                                                               overvalued. To obtain an EBO valuation near
      General Motors posted over an $8 billion                current price, a discount rate of 6.75% and an
       loss for 2005. This loss came despite strong            industry ROE of 5.21% must be used.
       vehicle sales for 2005.                             Relative Valuation:
                                                               Negative/Neutral: Due to GM’s negative
      General Motors largest supplier, Delphi, has            earnings estimate, P/E and PEG ratios are
       filed for bankruptcy. This would be a huge              negative. P/S and P/B are bullish, but could be
       blow for the company, which would halt                  due to greater risk for GM.
       production and cost the company billions.           Technical Analysis:
                                                               Positive/Neutral: The stock has some upward
                                                               momentum with 3 of the 6 indicators bullish,
      There have been significant downward
                                                               while two others are neutral.
       revisions for General Motors for this fiscal
                                                           Earnings Analysis:
       year.
                                                               Negative: GM has had significant negative
                                                               earnings surprises the last three quarters. There
      General Motors analyst’s recommendations                have also been significant downward revisions
       have been decreasing over the past year.                for GM’s earnings for this fiscal year.
                                                           Analyst Recommendations:
      The market has not yet factored in General              Negative: The mean rating for GM is declining,
       Motors hybrid line of vehicles, which I                 with zero buy recommendations.
       believe will have strong sales for GM.              Institutional Ownership:
                                                               Negative: Number of institutions and number of
      General Motors junk bond status has caused              shares held by institutions have both decreased.
       investors to be concerned with GM’s ability         Piotroski Analysis:
       to pay back their debt.                                 Neutral: GM is in the 5th quintile, indicating a
                                                               value stock. GM has a Piotroski score of four, a
      General Motors has some positive                        neutral sign.
       momentum which is a good sign for the
       stock in the future.




                                                                                                            1
Company Summary

General Motors, incorporated in 1916, they operate in two core business units; Automotive and Other
Operations (Auto and Other) and Financing and Insurance Operations (FIO).1 General Motors, Automotive
and Other Operations have four divisions; GM North America (GMNA), GM Europe (GME), GM Latin
America/Africa/Mid-East (GMLAAM), and GM Asia Pacific (GMAP). These divisions include the design,
manufacturing, and marketing of automobiles throughout the world. In North America, GMNA designs and
markets the following cars under the nameplates; Chevrolet, Pontiac, GMC, Oldsmobile, Buick, Cadillac,
Saturn, and Hummer.2 GM’s other division’s design and markets cars outside North America under the
nameplates; Opel, Vauxhall, Holden, Saab, Buick, Chevrolet, GMC, and Cadillac.

The FIO segment primarily relates to General Motors Acceptance Corporation (GMAC). GMAC provides
an array of financial services including; vehicle financing, dealership and other commercial financing,
residential mortgages, and personal automobile insurance.


Core business revenue and income for the nine months ending September 30, 2004 and 2005 (in millions):
                                                 2004                   2005             2004      2005
                                        Operating % Operating Operating   % Operating Net       Net
Core Business:                          Reveune    Revenue    Reveune     Revenue     Income    Income
Automotive and Other Operations          $118,404      83.39%    $115,844      81.91%      $687   ($6,030)


Financing and Insurance Operations         $23,579      16.61%     $25,580       18.09%    $2,213    $2,219

 Total                                    $141,983     100.00%    $141,424      100.00%    $2,900    ($3,811)
3


Automobile divisional breakdown (in millions):
                                                    2004        2005
                                                 Net Income Net Income

Automotive Divisional breakdown:
          GMNA                                        $668       ($4,849)
          GME                                        ($397)        ($996)
          GMLAAM                                       $38            $5
          GMAP                                        $612         ($438) 4

Competition and Strategy

General Motors is the largest automobile maker in the world, but is far from the most profitable. General
Motors posted record losses of over $8 billion. General Motors is facing increasing foreign competition from
Toyota and Honda and DaimlerChrysler. GM is facing this increased competition while the entire Auto
industry is down.

General Motors has had to deal with lower profit margins, due too high costs associated with their car
manufacturing. These cost increases have come from high health care and retirement costs due to an aging
work force. GM has also suffered from declining Sport Utility Vehicle sales in 2005, because of high fuel

1
  www.reuters.com
2
  www.reuters.com
3
  Figures from GM’s 10-Q 9/30/05
4
  Figures from GM’s 10-Q 9/30/05


                                                                                                              2
costs that have caused consumers to be more fuel concision. GM is increasing R&D and is in the process
producing a new line of hybrid vehicles. This vehicles use both electricity and gas to operate, allowing for
increased fuel efficiency. GM is hopeful that these vehicles will boast sales and profitability over the next few
years. To help cut costs GM announced a restructuring which will include a cut of 30,000 jobs and closure of
8 production plants in North America. Delphi, GM’s largest supplier which they spun off in 1999, filed for
bankruptcy October, 8 2005. They are currently in labor talks with the labor union representing their 34,000
employees and GM. If Delphi can not make a deal with the labor union they will have to go through with the
bankruptcy. This would be a huge blow for GM has this would halt producing and cost them billions of
dollars.

DaimlerChrysler has recovered from a bad year in 2004, to post profits of $2.9 billion in 2005. They have
also seen profit margins fall as costs continue to rise. DaimlerChrysler is looking at cutting 6,000
administrative jobs over in the next year and is in negotiations over cutting health benefits.5 Their flagship
brand, Mercedes, is losing money even after posting fourth quarter profits.

Toyota has seen increased profits and market share, posting $10 billion profits for the year ending 3/31/05.
Toyota is eyeing the full sized pick-up market as they have come out with a new version of their Tundra,
which will help them compete with Ford and GM in the truck market. Toyota has traditional been a car
company selling their popular Corolla and Camay lines. Toyota had a huge quarter ending 12/31/05 where
their profit was up 34%. Toyota has recently overtaken Ford as the number two automaker in the world.
Analysts expect Toyota to over take GM for the number one spot in the next couple of years.

Ford recorded profits of $2 billion for the fiscal year ending 12/31/05; this was down 42% from the pervious
year. To cut costs Ford as announced that they will cut 30,000 jobs and close up to 14 plants; this comes as
GM announces similar cuts.6 Ford has lost market share in each of the past five years to fall to 17.4% for
2005. Their top U. S. sales analyst believes that Ford’s market share will continue to fall despite their efforts
to restructure.

Historical Revenue and Earnings:

                       Historical Revenue (in millions)              Historical Earnings (earnings per share)
                  FY 12/05        FY 12/04        FY 12/03          FY 12/05        FY 12/04        FY 12/03
1st Quarter        45,773.0        47,779.0         49,365.0         -$1.92            $2.25          $2.71
2nd Quarter        48,469.0        49,148.0         48,308.0         -$0.51            $2.36          $1.58
3rd Quarter        47,182.0        44,858.0         45,929.0         -$2.89            $0.78          $0.79
4th Quarter         N/A            51,826.0         41,922.0          N/A             -$0.44          $2.06
Total             141,424.0       193,611.0        185,524.0         -$5.35            $4.95          $7.14

General Motors has seen decreased revenue over the past year, as the auto market has declined over the past
two years. GM’s EPS has also decreased significantly over the past two years has their fixed costs have
increased leading to decreasing profit margins.




5
    www.yahoo.com
6
    www.reuters.com


                                                                                                                 3
I. Fundamental Valuation
General Motors         PARAMETERS                           FY1       FY2       Ltg
as of 2/13/06          EPS Forecasts                          -0.16     2.33     5.21%              Model 1: 12-year forecasting horizon (T=12).
                       Book value/share (last fye)            29.59                                             and a 7-year growth period.
                       Discount Rate                         9.85%
                       Dividend Payout Ratio                 0.00%
                       Next Fsc Year end                       2006
                       Current Fsc Mth (1 to 12)                  2
                       Target ROE (industry avg.)            6.06%

                       Year                                   2006      2007      2008      2009          2010       2011        2012       2013     2014     2015     2016     2017
                       Long-term EPS Growth Rate (Ltg)                          0.0521    0.0521        0.0521     0.0521      0.0521
                       Forecasted EPS                        -0.16      2.33       2.45      2.58          2.71       2.85        3.00
                       Beg. of year BV/Shr                  29.590    29.430    31.760    34.211        36.791     39.504      42.359
                       Implied ROE                                     0.079     0.077     0.075         0.074      0.072       0.071

ROE                    (Beg. ROE, from EPS forecasts)        -0.005     0.079    0.077     0.075         0.074       0.072      0.071       0.069    0.067    0.065    0.063    0.061
Abnormal ROE           (ROE-r)                               -0.104    -0.019   -0.021    -0.023        -0.025      -0.026     -0.028      -0.030   -0.032   -0.034   -0.036   -0.038
growth rate for B      (1-k)*(ROEt-1)                         0.000    -0.005    0.079     0.077         0.075       0.074      0.072       0.071    0.069    0.067    0.065    0.063
Compounded growth                                             1.000     0.995    1.073     1.156         1.243       1.335      1.432       1.533    1.639    1.748    1.861    1.978
growth*AROE                                                  -0.104    -0.019   -0.023    -0.027        -0.031      -0.035     -0.039      -0.045   -0.052   -0.059   -0.067   -0.075
required rate (r)                                   0.099     0.099     0.099    0.099     0.099         0.099       0.099      0.099       0.099    0.099    0.099    0.099    0.099
discount rate                                                 1.099     1.207    1.326     1.456         1.600       1.757      1.930       2.120    2.329    2.559    2.811    3.087
div. payout rate (k)                                0.000
Add to P/B             PV(growth*AROE)                        -0.09     -0.02    -0.02     -0.02         -0.02       -0.02       -0.02      -0.02    -0.02    -0.02    -0.02    -0.02
Cum P/B                                                        0.91      0.89     0.87      0.85          0.83        0.81        0.79       0.77     0.75     0.73     0.70     0.68
    Add: Perpetuity
   beyond current yr   (Assume this yr's AROE forever)        -0.96    -0.16     -0.18     -0.19         -0.20       -0.20      -0.21       -0.22   -0.23    -0.23    -0.24    -0.25
Total P/B              (P/B if we stop est. this period)      -0.05     0.73      0.70      0.67          0.64        0.61       0.59        0.56    0.52     0.49     0.46     0.43
Implied price                                                 -1.65    21.89     20.96     20.08         19.23       18.42      17.64       16.70   15.76    14.83    13.92    13.02

Check:
Beg. BV/Shr                                                   29.59     29.43    31.76     34.21         36.79       39.50      42.36       45.36   48.49    51.72    55.07    58.52
Implied EPS                                                   -0.16      2.33     2.45      2.58          2.71        2.85       3.00        3.12    3.24     3.35     3.45     3.55
Implied EPS growth                                                    -15.563    0.052     0.052         0.052       0.052      0.052       0.040   0.037    0.034    0.031    0.028



Inputs:

       1. EPS Forecasts and long-term growth rate (LTG) from www.investor.reuters.com
          (02/14/06).
       2. Book value per share derived from 12/31/05 balance sheet. Total equity = $16,734(mil),
          common stock outstanding = 565.5(mil), $16,734/565.5= $29.59.
       3. Discount rate: Using CAPM (r=rf+(E(rm)-rf)), risk free taken from current 20 year Treasury
          bond at 4.73%, General Motors bata estimate at 1.20 from www.investor.reuters.com, and
          expected market returned estimated at 9%.
       4. Dividend payout ratio from www.investor.reuters.com.
       5. Next fiscal year-end is 2006.
       6. Current fiscal month is 2 (February).
       7. Target ROE= 6.06%, the lagging 5 year Automobile & Parts industry ROE from
          www.investor.reuters.com.

Output and Sensitivity Analysis:
   1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the
       EBO valuation is $13.02.
   2. Changing the discount rate to 6.75% (-3.10%) and the industry ROE to 5.21% (-0.85%), the
       EBO valuation is $21.91. If the expectations in the model are realized, we should expect a
       return of approximately 6.75%/year.
   3. Changing the growth rate to 15.21% (+10%), the EBO value increases to $15.26.
   4. Changing the industry ROE to 16.06% (+10%), the EBO value increases to $41.43.

       Given the current price of General Motors at $21.98, the EBO valuation is low for the company
       at $13.02 (only 59% of current price). Decreasing the industry ROE to 5.21% (-0.85%), which is
       equal to the company’s growth rate, and decreasing the discount rate to 6.75% (-3.10%) yields an
       EBO of $21.91, which is slightly lower than General Motors current price. This change to the
       model suggests that we can expect a 6.75% return on General Motors. The industry ROE is
       more sensitive than the growth rate, while both the industry and the growth rate are more
       sensitive than the discount rate.



                                                                                                                                                                      4
II. Relative Valuation
Comparables
                                                                         Mean FY2
                                                                      Earnings Estimate    Forward    Mean LT      PEG        P/B     ROE        Value
    Ticker    Name                          Mkt Cap   Current Price   (next fiscal year)    P/E      Growth Rate             (MRQ)    5 yr ave   Ratio     P/S
1   DCX       Daimlerchrysler AG             58,730      $57.83             $4.22           13.70       6.07%       2.26      1.39    4.68%       0.30     0.34
2   F         Ford Motor Co.                 15,730       $8.48             $0.64           13.25       5.86%       2.26      1.23    4.18%       0.29     0.09
3   TM        Toyota Motor Co.              176,460      $108.44            $6.80           15.95       5.00%       3.19      1.94    11.33%      0.17     0.98
4   HMC       Honda Motor Co. Ltd.           53,970      $29.35             $2.76           10.63       6.50%       1.64      1.64    13.62%      0.12     0.67


    GM        General Motors Corp.           12,430      $21.98            -$0.16          -137.38      5.21%      (26.37)   0.74     1.93%      0.38      0.06


              Implied Price based on:                                                       P/E                    PEG        P/B                Value     P/S
1   DCX       Daimlerchrysler AG                                                           ($2.19)                 -$1.88    $41.29              $17.03   $124.55
2   F         Ford Motor Co.                                                               ($2.12)                 -$1.88    $36.53              $16.87   $32.97
3   TM        Toyota Motor Co.                                                             ($2.55)                 -$2.66    $57.62              $9.82    $359.01
4   HMC       Honda Motor Co. Ltd.                                                         ($1.70)                 -$1.36    $48.71              $6.90    $245.44


              High                                                                          -$1.70                 -$1.36    $57.62              $17.03   $359.01
              Low                                                                           -$2.55                 -$2.66    $36.53              $6.90    $32.97
              Median                                                                        -$2.16                 -$1.88    $45.00              $13.34   $185.00




Indicator                                                                Interpretation
P/E                                     Neutral/Bearish – General Motors P/E is significantly lower than their
                                        competitors and to the industry, this is due to General Motors negative
                                        earnings estimate for the 2006 year. GM is either 1) undervalued, 2) the market
                                        expects GM to grow more quickly, or 3) GM has lower risk than competitors.
PEG (P/E/G)                             Neutral – GM has a significantly lower ratio then their competitors in the
                                        Automotive & Parts industry. GM’s negative P/E and PEG are driven, by its
                                        negative earnings estimate.
P/B                                     Bullish – P/B is low compared to competitors meaning GM is either
                                        undervalued, more risky than other firms in the industry, or its low P/B is
                                        driven by its low ROE.
Value (P/B/ROE)                         Bearish – high value ratio implies that GM is either overvalued or has less risk.
                                        In addition, suggests low P/B is driven by low ROE.
P/S                                     Bullish – lower P/S ratio than competitors, industry and sector. GM is either
                                        undervalued, has low profit margin, or has greater risk.
Summary                                 Three out of five indicators are bearish or neutral; the only positive indicators
                                        are P/B and P/S these indicators could be a result of GM being more risky
                                        than their competitors. GM’s P/E and PEG are influenced by its negative
                                        earnings estimate for the 2006 fiscal year. These indicators implying that GM is
                                        more risky and is not a good buy. Overall these ratios suggest that GM is
                                        undervalued or has greater risk than their competitors.




                                                                                                                                                   5
III. Technical Analysis




                          6
Indicator                                            Interpretation
Bollinger Bands   Neutral: GM is currently trading in the middle of the bands, indicating the
                  stock is not poised for a move.
Stochastics       Bearish: %K=58.40, %D=65.88. The indication is bearish, %K is lower than
                  %D. The gap is decreasing a bullish sign.
Moving Averages   Bullish: The price is above both the 25 day moving average and the 50 day
                  moving average, both are positive indicators.
MACD              Bullish: The MACD is positive and the oscillator is above the slower moving
                  average, both are bullish indicators.
Regression        Bullish: The price is in a recent upward trend, which is positive indicator and
                  suggests the price will continue to increase in the future.
PriceROC          Bearish/Neutral: The price is below the 100 day moving average, a bearish
                  indicator, but the price is increasing compared to the 100 day moving average a
                  bullish sign.




                                                                                                7
IV. Earnings Analysis
                                          Earnings Surprises
                     Dec-05            Sept-05          Jun-05            Mar-05           Dec-04
                    (Last qtr)      (2 qtrs prior)   (3 qtrs prior)    (4 qtrs prior)   (5 qtrs prior)
Estimate              -0.12             -0.81             0.03             -1.50             0.92
Actual                -2.09             -1.92            -0.56             -1.48             1.01
Difference            -1.97             -1.11            -0.59              0.02             0.09
                                      Mean Earnings Estimates
                     Mar-06            Jun-06           Dec-06           Dec-07          LT Growth
                                                                                            Rate
Earnings             -0.36            0.24             -0.17          2.33                  5.21
# Estimates           14               14               16             15                     7
                         Earnings Per Share Estimates Revisions Summary
                                            Last Week                     Last 4 Weeks
                                   Revised Up        Revised       Revised Up     Revised Down
                                                      Down
Quarter ending 03/06                    1                0              1               3
Quarter ending 06/06                    0                1              0               4
Year ending 12/06                       0                1              2               13
Year ending 12/07                       0                0              2               5

General Motors had negative earnings surprises in the last three quarters, with the other two quarters
beating analyst’s expectations. In the past four weeks there have been significant downgrades in
analyst’s EPS revisions for the year ending 12/06. These downgrades indicate that analysts are
anticipating GM rebounding in the 2007 fiscal year not the 2006 year; this could be a bad sign for
GM’s stock price in the next year.




                                                                                                         8
V. Analysts’ Recommendations
                     Current                1 Month Ago         2 Months Ago          1 Year Ago
Buy                      0                       1                    1                    0
Outperform               2                       4                    4                    3
Hold                     9                       8                    6                   10
Underperform             1                       1                    2                    0
Sell                     5                       4                    4                    2
No Opinion               0                       0                    0                    0
Mean Rating            3.53                    3.17                 3.24                 3.07

Analysts’ recommendations have declined over the past two months and from a year ago. The
majority of recommendations have been either hold or sell, which is a bearish indicator. There are
currently zero buy and only two outperform recommendation, a bearish sign. Since analysts’
recommendations of GM are declining, analysts’ believe that GM’s stock is a bad buy right now.




                                                                                                     9
VI. Institutional Ownership
                                   # of Holders      % Beg. Holders         Shares             % Shares
Shares Outstanding                                                        565,500,000          100.00%
Total Positions                         384              82.58%           436,079,648          77.00%

New Positions                           49               10.54%           18,743,552             3.31%
Soldout Positions                       85               18.28%           -11,681,604           -2.07%
Buyers                                  167              35.91%           37,201,660             6.58%
Sellers                                 248              53.33%           -54,814,180           -9.69%
Beg. Total Inst. Positions              465              100.00%          453,692,168           80.23%

# Net Buyers/3 Mo. Net Chg.             -81              -17.42%           -17,612,520          -3.11%

The net number of buyers for General Motors has decreased by 81, a bearish indication. There has
also been a 3.11% decrease in number of shares owned by institutions, a slightly bearish sign. Both
indicators are indications that institutional investors are bearish towards GM.




                                                                                                      10
VII. Piotroski Analysis

A. P/B ratio and quintile (1=growth; low P/B, 5=value, high P/B): _5th quintile_________

B. Piotroski Score: ____4____________


       Piotroski Item          Variable needed to compute               Value              Points
1. Positive net income       TTM net income                       $-4,067,000

2. Positive cash flow        TTM cash flow                        $5,341,000         1

3. Earnings Quality                                                                  1

4. Decreasing Debt           Debt/assets most recent ann figure   17.30
                             Debt/assets previous ann figure      17.75              1

5. Increasing working        Current ratio most recent ann        3.27
capital                      figure
                             Current ratio previous ann figure    3.45

6. Improving Productivity    Asset turnover most recent ann       0.04
                             figure
                             Asset turnover previous ann figure   0.05

7. Growing Profitability     ROA most recent ann figure           0.60%
                             ROA previous ann figure              0.93%

8. Issuing Stock             Shares outstanding most recent ann   562 million
                             Shares outstanding previous ann      560 million        1

9. Competitive Position      Gross margin most recent ann         17.3%
                             Gross margin previous ann            18.0%

Total                                                                                4




                                                                                                    11