- Value investor Warren Buffett focusses on finding excellent firms at attractive prices.
- GM’s focus on technological advancements and innovations puts the company in a favorable market position.
- With the promising financial outlook and valuation pushing 20% upside, the stock appears to be attractive at the current market price.
Technology Incorporated in Auto-Industry
Like many other industries, technology is transforming the auto industry at an incredible pace. With the heavy focus on environmental issues, traditional vehicles are being transformed to electrical motors due to their impact on the environment. The vehicle industry is also integrating tech-connected features, which make vehicles more than just a means to get from point A to point B.
General Motors (NYSE: GM) is one of the early adopters and a leading company in this transformation process in the auto-industry. Its solid experience in the auto industry combined with its ability to access necessary resources, such as capital, places GM in a favorable market position during this innovating process.
The attractive valuation and the market positioning of GM make the case even more interesting for potential investors. GM’s falls under Warren Buffet’s investing strategy, which is to find quality companies at attractive valuations.
The General Motors Business Model
General Motors designs, builds, and sells motor vehicles, including cars, trucks, crossovers, and automobile parts. GM operates through five segments; GM North America, GM South America, GM Europe, GM International Operations, and GM Financial. GM North America is the largest segment accounting for more than 70% of its revenues. In 2016, GM delivered 9.6 million vehicles globally, which constitutes 10.2% of the total vehicles delivered by the industry.
GM offers its vehicles directly to consumers as well as through dealers. There are over 19,000 dealers selling GM vehicles in 125 countries around the globe. GM has assembly, manufacturing, distribution, office, or warehousing operations in more than 60 other countries besides North America.
In the Automotive industry, GM in North American develops and manufactures vehicles under Buick, Cadillac, Chevrolet, and GMC brands. Outside North America, GM also provides the Holden brand in addition to the other brands.
Disruptive Trends: Connectivity Services and Electrified Vehicles
The automotive industry is becoming disrupted by on-demand mobility services, such as data connectivity services and shared mobility. These forms of connectivity will allow drivers to use their idle time and consume different forms of media and services. McKensy & Company claims that this innovative element will create an additional 30% growth in potential revenues for auto industry. GM has already started integrating such services in their vehicles and it is leading the US market with more than 3 million Wi-Fi enabled vehicles.
Considering the tough discussions about environmental protection policies, electric vehicles are becoming viable and competitive. Factors such as harsher regulations on gas emission, lower battery costs, and increasing consumer preference will create potentially a new momentum for penetration of electric vehicles in the upcoming years. GM has a vision for strongly establishing itself in the segment of electric cars. GM’s Executive Vice President of Product Development stated that “General Motors believes in an all-electric future”
Q4 and 2017 Yearly Performance
Fourth quarter produced a decline in net revenue of $2.2 Billion or 5.6% decrease from the same period of previous year. The decline is attributed mainly to the decrease in wholesales in North America. Besides the decline in revenue, the operating income margin and the adjusted EBIT margin improved substantially to 6.8% and 8.2%, respectively. The improvements were primarily caused by favorable changes in price and cost performance, which offset the decline in wholesale.
General Motors managed to generate a record full-year performance from continuing operations in 2017 despite a decline in revenues of 2.4%. For the full-year of 2014, GM generated net revenues of $145.6 billion. Combined automotive segments comprise 91.7% of the net revenue and the GM Finance constitutes 8.3% of the net revenue.
As for the number of vehicles, GM experienced a decline of 4%. The largest market remains the Asia/Pacific, Middle East, and Africa market with 49% of the total vehicles sold with China constituting more than 87% of the vehicles sold in this market. The largest decline in the number of vehicle delivered is noticed in Europe, which experienced a decline of 41% dropping the overall share of GM vehicles sold in Europe at only 7% in 2017.
The most successful product under GM is the Chevrolet brand that comprises more than 43% of the total number of vehicles delivered in 2017.
source: 10K GM
Healthy Financial Position
General Motors has maintained a solid financial position in regards to liquidity. Throughout their operations in the last 5 years, GM managed to keep a balance of cash & short-term investments of more than $20 billion.
According to the analyst’s forecasts, GM is expected to have a substantial improvement in the performance for the next five years. The estimated EBITDA is over $20 Billion for each year and NOPAT is forecasted to reach $10 billion. In addition, GM is expected to maintain their strong liquidity level by generating free cash flow of around $11 Billion in each of the next 5 years giving them the competitive advantage in developing new products, especially the advancement of electrical vehicles.
GM operates in a highly competitive industry alongside peers like Ford (NYSE: F) and Tesla (Nasdaq: TSLA). With the rapid pace of technological and innovative improvements in the auto industry, companies are required to invest heavily in their research and developments in order to stay up-to-date on innovations in the industry. This adoption in the ever-changing sector can potentially consume a substantial amount of assets.
General Motors Valuation: 35%+ Upside
Analysts forecast that revenues will decline for 2018 but GM is expected to generate solid revenues the following 4 years. Besides heavy investing in developing new technologies for its vehicles, General Motors is expected to improve its EBITDA margin to the range of 16-17% of revenues in each of the next five years.
In addition, finbox.io’s three separate valuation models generates an average fair value estimate of $41.65 per share, which represents an upside of 17% over the current trading price of $35.59.
Conclusion: Well-positioned and Primed for Returns
With the substantial focus on technological improvements and innovation for its vehicles, GM is positioned in a favorable situation compared to its most direct competitors. The inclusion of technological features in its vehicles as well as the launch of electrified vehicles enables the company to be part of a promising business environment. Furthermore, the favorable financial elements mentioned above imply nearly 20% upside potential.
Author: Matt Hogan
Expertise: Valuation, financial statement analysis
Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.
Matt can be reached at firstname.lastname@example.org.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.