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1 Car Company That Would Fit in Warren Buffett's Portfolio

By John Rosevear - May 7, 2015 at 6:22PM

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The most Berkshire-like car company just might be the recovering auto giant that Berkshire has already invested in.

Last year, after a conversation with GM CEO Mary Barra, Warren Buffett bought a new Cadillac XTS sedan. It turns out that he's a fan of more than GM's latest cars. Source: General Motors Company.

Warren Buffett and his investing team at Berkshire Hathaway ( BRK.A -0.45% ) ( BRK.B -0.59% ) love basic, all-American businesses that are likely to be around for a long time. Just look at some of the companies and brands in Berkshire's portfolio: Coca-Cola, Deere & Company, Heinz, IBM , and a host of other household names.

Which carmaker fits in with those brands. and with Buffett's famous approach to investing? Which auto company is financially stable, with strong, stable management, above-average growth prospects, and a portfolio of great brands that is likely to endure for a long time?

I'd argue that the best possible answer to that question, believe it or not, is the giant automaker that is already in Berkshire's stock portfolio: General Motors ( GM -2.15% ). Berkshire owned 41 million shares of GM as of the end of 2014, or about 2.55% of the automaker, a stake worth about $1.46 billion.

That might surprise a lot of folks. GM crashed into bankruptcy in 2009 after decades of mismanagement. GM is solidly profitable nowadays, but its profits lag far, far behind those of its giant global peers, Toyota and Volkswagen

So what does Buffett see in General Motors?

We don't really know for sure. Buffett has praised CEO Mary Barra and GM's current leadership team, and he recently bought himself a new Cadillac. But he hasn't given a detailed explanation of the thinking behind Berkshire's big stake.

But it's not hard to make some educated guesses.

A global plan to boost profits in a big way
Here's the big knock on GM: It's a huge global automaker that has never really been able to harness the advantages of its scale. 

Here's the buy case for GM stock: Barra and her team have a smart, well-thought-out plan to change that and boost the company's profits to rival Toyota's and VW's -- and the plan is already starting to work. Barra's hoping to boost GM's adjusted pre-tax profit margins to between 9% and 10% by "early next decade." (It was 5.8% last quarter).

Her plan has several key components:

  • Big investments in products and technology. GM bumped its annual capital expenditures to $9 billion to fund a more aggressive new-product schedule. It's also funding the development and implementation of some advanced technology that will reduce the weight of those products and improve their fuel economy. GM is also making big strides in self-driving technology, and with electric cars and hybrids. 
  • A big boost for Cadillac. GM expects the global market for luxury cars to grow significantly over the next few years, and it wants Cadillac to be a first-rank player -- not just in the U.S., but also in China, and even Europe (eventually). It's spending $12 billion on new models and upgrades for the old brand, with aggressive targets for sales and profit margins. 
  • More growth in China. GM trails only Volkswagen in the still-booming Chinese market, and it's investing big for future growth. GM and its Chinese joint ventures will spend $14 billion between 2014 and 2018, opening five new factories and introducing sixty new or refreshed models.
  • Boosting GM Financial. GM wants its in-house financing arm, GM Financial, to become a major global profit center. It's financing more and more of GM's sales around the world, including in China.
  • More operating efficiencies. GM is improving its long-troubled relationships with key suppliers in ways that will both cut costs and help GM get dibs on the latest innovations. It's also working on a complex plan to sharply increase the number of parts shared "under the skin" among its vehicles, which should reduce engineering costs, improve GM's economies of scale still further, and improve overall quality.

Here's what makes the plan credible
It's a solid plan. Big automakers tend to be cyclical and slow-growing, but the potential of Barra's plan to dramatically boost GM's bottom line over the next several years makes the General an intriguing investment. I suspect that's what drew the attention of Buffett and his investing deputies at Berkshire.

But my guess is what sold Buffett is that we're already seeing big positive changes.

A sweeping overhaul of GM's product-development process that Barra implemented in 2011 (when she was GM's global product chief) has led to much-improved quality for GM's latest cars and trucks, while cutting a billion dollars a year in costs.

Better-quality vehicles mean better profits for GM. Here's why: Top-notch cars and trucks can be sold at higher prices with fewer discounts. GM's adjusted pre-tax margins in its North America unit go up and down with the rhythms of its new product launches, but they haven't dipped below 7% since the first quarter of 2013. That's the kind of consistency that eluded Old GM.

Now the challenge is for GM to export that consistency to its overseas regions. That will be a big challenge, but Buffett seems to think that Barra and GM are up to it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$418,676.00 (-0.45%) $-1,890.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$277.43 (-0.59%) $-1.66
General Motors Company Stock Quote
General Motors Company
$59.71 (-2.15%) $-1.31

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