Why I'm Buying General Motors Company

When General Motors (NYSE: GM  ) reported earnings last week that were well below analyst estimates, it seemed like the only thing holding the stock up from an even steeper fall was how low investor expectations were in the first place: The company's forward earnings were already valued well below the market average, indicating a general lack of faith in the company's ability to deliver. It's fair to say that since its emergence from bankruptcy, General Motors (or Government Motors, as some dubbed it) has been a pretty unloved name. Yet today the company looks healthier than ever, and despite lingering problems, the stock is selling for a deep discount that looks attractive enough for me to buy.

It's no wonder the company has faced criticism. Even before its bankruptcy, it had acquired a reputation for complacency, bloated costs, stale design, and an out-of-touch style of management epitomized by former CEO Richard Wagoner taking a private jet to Washington to plead for a bailout. Receiving that bailout, and enduring years of direct government stock ownership, hardly burnished its image.

Today, two of the biggest challenges that contributed to GM's bankruptcy continue to overhang its performance. It still has underfunded global pension liabilities of nearly $20 billion. While GM's total pension obligations are about 80% funded, my Foolish colleague Daniel Miller noted recently that GM's progress in reducing these liabilities lags both close rival Ford (NYSE: F  ) and the U.S. corporate average. In its earnings report last week, the company indicated it still didn't see this as a pressing issue, noting it had no plans to contribute to its pension plans in 2014.

Neither has General Motors solved its ongoing problems in Europe, where it has lost nearly $20 billion over the past 15 years. Losses came in at a relatively light $800 million in 2013, but with a stagnant auto sales environment in Europe, GM Europe will only meet its goal of breaking even by 2015 by aggressively cutting costs and reducing its footprint in the region.

Not your father's GM
Despite all that, General Motors simply isn't the same company that failed so catastrophically during the recession. Bankruptcy gave General Motors the opportunity not only to install forward-thinking, new management but to dramatically reduce its bloated cost structure and refocus on creating good products. In 2008, General Motors needed to sell around 4 million vehicles to break even, and its product mix was heavily reliant on SUVs and trucks for profitability, with light vehicles coming in as something of an afterthought. Aggressively confronting manufacturing and legacy labor costs has lowered that breakeven point by half, to around 2 million vehicles, leaving GM's North American unit financially healthy even at the low point of a sales cycle.

Besides simply cutting costs, General Motors has bent itself to the task of making cars people really want to buy. The new Chevy Impala was named Consumer Reports' best sedan, and the Corvette Stingray and Chevy Silverado were named the North American car and truck of the year, respectively, at the Detroit 2014 auto show.

Beyond awards and accolades, however, GM's progress can be seen in the pricing discipline it has exercised in selling its vehicles. Since its emergence from bankruptcy, GM has been able to win sales of its newer vehicles without relying on the discounts and cheap financing it used to win sales against competitors' superior products in the pre-recession era. That has allowed GM to command the highest average transaction price of any of the big eight North American automakers, and supported high North American profit margins around 8%.

Why now?
2014 looks to be an excellent year for the company. GM and several analysts have predicted total U.S. automobile sales of 16 million-16.5 million, which would mark the best year since 2007 while remaining well under the historic high of nearly 18 million. With market share around 18%, its North America unit should be spinning plenty of cash to address problems elsewhere and execute on opportunities to enhance shareholder value. GM has already taken one of the most shareholder-friendly actions a company can take: It has instituted a dividend payment, currently yielding a very tempting 3.4%.

Most importantly, in light of the progress it has made and the catalysts ahead of it, GM stock just looks cheap. Concerns about Europe, pension liabilities, and discounting seem to be built into the stock price, with forward earnings valued at less than half the market average. GM is still navigating its transformation, but has already done enough to demonstrate that it is both willing and able to tackle major challenges.

With a more profitable product line that it has seen in years or decades and a North American market that is still harboring significant pent-up demand, I'm buying in before the market values this reinvigorated business for what it's worth.

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Read/Post Comments (20) | Recommend This Article (23)

Comments from our Foolish Readers

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  • Report this Comment On February 12, 2014, at 5:39 PM, tonto22 wrote:

    Screwed their pensioner's so badly during the bankruptcy they don't have to contribute to the pension fund in 2014. Is this a wonderful company or what?

    Vulture capitalism much?

  • Report this Comment On February 12, 2014, at 5:42 PM, jtmonrow wrote:

    :Why I'm Buying General Motors Company"

    Because you want ot give those wastrels the opportunity to gobble up your money again?

  • Report this Comment On February 12, 2014, at 5:43 PM, djm20 wrote:

    With the Fool's passionate and continuing support for this Federal Admininsration's Obamacare legislation despite the blatant incompetency, misrepresentations by the President, and repeated postponements and exceptions for every segment except the lowly individual citizen makes their advice on any subject suspect.

    The suspicion is that every opinion is tainted or influenced by the White House and the Democrat party leadership. Therefore why would anyone accept this opinion on Government Motors (did I spell that right?) as legitimate?

    In my humble opinion, the Fool as lost all credibility with its desire to be politically correct and please the White House.

  • Report this Comment On February 12, 2014, at 7:12 PM, rmarm wrote:

    It would be nice if there were more analysis in this article to back up what amounts to opinions that the author seems to want to be true a bit too much.

    Sorry, not convinced.

    Good luck with this.

  • Report this Comment On February 12, 2014, at 7:40 PM, cmalek wrote:

    Tell me again, How much is the new Government Motors CEO getting paid?

    Obviously you are not one of those Fools that invests in Socially Responsible companies.

  • Report this Comment On February 12, 2014, at 8:22 PM, PesoBob wrote:

    Why I am not buying G M or Chrysler:

    Because one day they went bankrupt and screwed investors, bond holders and pensioners and the next day were in business again. That is why I will never buy a GM or Chrysler product and bought my first Ford at 63.

  • Report this Comment On February 12, 2014, at 10:18 PM, chopchop0 wrote:

    Fool me once, shame on me. Fool me twice?

    Seriously, buying Government Motors here would be foolish, not Foolish.

  • Report this Comment On February 12, 2014, at 10:58 PM, TOM48 wrote:

    As a retired GM employee, I would say you should just throw your money into a deep hole instead. The same GM culture is still there. It will always be there. You think the govenment can waste money? You haven't seen GM do it.

  • Report this Comment On February 13, 2014, at 12:48 AM, snapperreef wrote:

    As long as GM management has to answer to the demands of the UAW, the company will be on the edge of a cliff. When they were allowed to simply abrogate their obligation to their bond holders with the support and help of the U S Govt. they lost all trust anyone could have in the company. Remember the union got the money for the bonds that outside investors owned. I think that fits the definition of fraud and worse.

    How anyone could trust GM and expect to make money with such a company I cannot understand.

  • Report this Comment On February 13, 2014, at 5:56 AM, AnsgarJohn wrote:

    Hi Daniel, Why are you buying now instead of a year and a half ago, when the GM was trading at roughly half the price? You're entering now at a rosy part of the cyle.

  • Report this Comment On February 13, 2014, at 5:56 AM, AnsgarJohn wrote:

    +c

  • Report this Comment On February 13, 2014, at 6:48 PM, akbuyme wrote:

    Cause I haven't delved into the details, but how much is the recall expected to impact GM? Are earnings set aside, or will it be funded via bonds and other unsecured debt? How much is the expected liability?

    You mention that the Chevy Silverado was named Truck of the Year at the Detroit Auto 2014 show. No mention of the recall for service on said truck, potential overheating of the exhaust system starting engine fires.

    That doesn't even include last year's recalls.

  • Report this Comment On February 14, 2014, at 4:55 PM, Pasmal wrote:

    Would you sell F and buy GM? Isn't F a better financially sound company than GM?

  • Report this Comment On February 14, 2014, at 8:28 PM, apalmerjr wrote:

    I'm definitely staying out of the investing part of GM, already lost money on GM bond a few years back and will never buy a new GM product, might buy a used one if the deal is right.

  • Report this Comment On February 15, 2014, at 6:41 AM, TMFCatoMinor wrote:

    Ansgar John: It certainly was a better buy a year and a half ago. I was a bit too early to reach the very bottom, buying up a half position in March 2012, but I'm still quite happy with the 40% gain I'm sitting on. Now that it's reinitiated a dividend, I'm happy to fill out that position. I have a hard time looking at a price/cash flow of under 5 and a forward price/earnings of 7 and calling it a "rosy part of the cycle." Of course, if you think the whole enterprise will fold, any part valuation is too high, but I obviously don't think it will.

  • Report this Comment On February 15, 2014, at 6:48 AM, TMFCatoMinor wrote:

    Pasmal: As my disclosure shows, I own both, and intend to do so for the long haul. I also have a slurry of bullish options (bought calls and written puts) on Ford, which I do have more confidence in. Ford has obviously had a better track record of fiscal management, but at the same time it's more highly valued on metrics I pay attention to like price/cash flow and price/forward earnings, so General Motors has more room to grow on multiples expansion alone. Throw in the fact that General Motors now offers a significantly higher dividend yield with plenty of room for growth, and I think there's a case to made for owning both, if you've got room for two automaker positions in your portfolio. If you had to choose one, I would certainly not fault anyone for choosing Ford.

  • Report this Comment On February 15, 2014, at 6:56 AM, TMFCatoMinor wrote:

    akbuyme: This article was published before GM announced the newest recall, so I'll be addressing that elsewhere. In brief, though, from what I've seen automaker recalls are more of a headline risk than an event that seriously impacts earnings. Every automaker has to deal with recalls, and typically the warranty hit isn't that significant compared to total earnings. Ford just spent $300 million on recall-related warranties a few months ago and still produced a record quarter. Toyota has already bounced back from its millions of recalls, and this new GM recall is orders of magnitude smaller.

  • Report this Comment On February 15, 2014, at 7:07 AM, TMFCatoMinor wrote:

    To all concerned that my politics are influencing my investing, you an always just ask. In 2012 I voted for Gary Johnson (Libertarian, formerly Republican but lost the nomination) for President, Kirsten Gillibrand (D) for Senate, and Bill Owens (D) for the House. In 2010 I voted for Cuomo (D) for Governor, Townsend (R) for Senate, and Owens (D) for the House. In 2008 I voted for McCain (R) for President, and John McHugh (R), for the House.

  • Report this Comment On February 15, 2014, at 7:21 AM, TMFCatoMinor wrote:

    cmalek: Right now, $4.4 million. Less than half as much as her predecessor, about a quarter of what Fiat Chrysler's CEO gets paid, and about 6% as much as Ford's CEO gets paid.

    And y'all know the Federal government no longer owns any of Government Motors, yeah?

  • Report this Comment On February 17, 2014, at 11:01 AM, Patentech wrote:

    GM stock and GM cars may not be such a bad buy!! I currently am well over 70 and have two substantially new Mercedes Benz cars. Yet, I just bought a Volt because the concept is so darn practical for an old timer like me, and I want to teach my grandchildren by example. While in the showroom, I saw other good, comfortable, fuel efficient Chevrolet cars that are priced tens of thousands of dollars less than my Mercedes. Perhaps I will switch to Cadillac. Perhaps when the baby boomers get to be my age, they too will want a practical, comfortable car that can take a pothole without ruining the tires and/or rim and use regular grade gas, not the premium required by Mercedes or BMW. I will buy GM stock, because I believe in the future (which for me is getting short!)

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