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Should You Follow the Big Money Into General Motors Company?

Robert Hanley
January 27, 2014

Institutional investors have been making a bee-line to General Motors (NYSE: GM) lately, including a high-profile investment by the Oracle of Omaha through his Berkshire Hathaway holding company. General Motors has enjoyed a wellspring of good news over the past few months, highlighted by its new Chevy Impala receiving the "Best New Car" award from during this year's Detroit International Auto Show. The company also convinced the U.S. Treasury to exit its GM stake in December. It stuck taxpayers with a hefty overall loss in the process, which has no doubt emboldened its investor base. So, should investors follow the big money in?

What's the value?
Despite its high-profile bankruptcy in 2009, GM has maintained its leading position in the North American market. This happened because GM maintained its operating structure fairly intact throughout the bankruptcy process, thanks to the Treasury's financial muscle. The bankruptcy allowed the company to do some housecleaning on its less-popular brands, like Saturn and Hummer. It also provided GM with opportunities to eliminate significant amounts of debt, reduce its domestic dealer network, and offload some pension obligations. While the U.S. Treasury's shadow likely impeded GM from removing all of its legacy obligations, it emerged from the bankruptcy as a much more streamlined company.

In fiscal 2013, GM generated mixed results as it reported a modest 1.8% increase in its top line, but flat adjusted operating profitability versus the prior-year period. Despite a year of strong volume for the domestic auto business in 2013, with volume estimated at nearly 16 million units, a competitive pricing environment hurt GM and saw major rivals chip away at its market share, including crosstown rival Ford (NYSE: F). On the upside, though, GM has continued to generate solid operating cash flow which has allowed it to reassemble its empire, which includes the key recent purchase of former subsidiary Ally Financial's international operations totaling roughly $4.1 billion.

Gauging the competition
Of course, competitors aren't exactly standing still and waiting for GM to get its second wind. For its part, Ford has been running in fifth gear in fiscal 2013. Ford has reported a rising market share in key geographies around the world thanks to new product introductions like the compact Fiesta ST in the U.S. market. The company has also benefited from a bump up to investment grade status by credit rating agency S&P, which has lowered Ford's funding costs for its massive financial-services operation.

The positive effects of Ford's design and operational improvement efforts, embodied in its One Ford strategy, have shown up in its fiscal 2013 financial statements with a 12.4% increase in its top line and better adjusted operating profitability. Like its competitors, Ford has gained from rising worldwide auto volumes, especially in the growing Chinese market where the company has worked hard to build a 4% market share despite still trailing archrival GM by a wide margin.  More importantly, Ford has generated strong operating cash flow. This has allowed Ford to pre-fund some of its pension obligations and charge up its product development activities, including plans for 23 new vehicles worldwide in 2014.

Also a rising threat is Tesla Motors (NASDAQ: TSLA), a David among the auto Goliaths, which has leveraged government financing and tax credits for electric-vehicle purchases into a fast-growing franchise in the luxury car market with its Model S sedan. The company seems to have finally figured out the manufacturing process, as it reported a 21.4% gross margin in fiscal 2013, nearly quadruple the level of the prior-year period