general motors internal initiation (buy-side) report

7/28/2019 General Motors Internal Initiation (Buy-Side) report

1/62

General Motors Company (NYSE: GM)April 2nd, 2013

0

Presented by:Meghan C., Mak D., Zeeshan M.


2/62

Outline

1

1. Company Description

2. Investment Thesis

3. Industry Outlook

4. Company Outlook

5. Risks and Catalysts

6. Valuation

7. Recommendation

8. Appendix


3/62

COMPANY DESCRIPTION

General Motors

2


4/62

Company Profile

3

General Motors Company designs, builds,

and sells cars, trucks, and automobile parts

worldwide, through a network of

independent authorized retailers.

The company also provides automotive

financing services through General MotorsFinancial Company, Inc. (GM Financial).

GM Financial offers financing to consumers

who are unable to obtain financing from

traditional sources.

The operations are divided in four

automotive segments: GM North America

(GMNA), GM Europe (GME), GMInternational Operations (GMIO), and GM

South America (GMSA).

Mar. 20, 2013: GM preventively recalls

34,000 Buick and Cadillac vehicles.

Dec. 19, 2012: General Motors to buy-back

remaining stake from Treasury.

Nov. 28, 2012: GM, SAIC and Wuling to

build $1 billion plant in Chongqing, China.

Oct. 5, 2012: Fiat to relaunch talks with GM

on Opel acquisition.

Aug. 26, 2012: GM to cut 30% of Opel jobs

in Germany.

Jun. 13, 2012: Opel to shut down Bochumplant by 2016.

COMPANY DESCRIPTION RECENT NEWS


5/62

Auto bailout

4

Bailout

In December 2008, the Federal government used $13.4 billion of the $700 billion TARP

bailout fund to rescue General Motors and Chrysler from immediate bankruptcy.

Many opposed the bailout, saying US automakers brought their near-bankruptcy on

themselves by lack of innovation and poor positioning in the energy efficient era, reducing

their competitiveness on a global level.

Ford was in a better shape because it had already mortgaged its assets in 2006 to raise $24.5

billion. Nonetheless, its competition probably got the upper hand thanks to the government

bailout.

Bankruptcy

On June 1st, 2009, GM filed for Chapter 11 bankruptcy, the fourth largest filing in US

history. Consequently, it sold Hummer, Saturn, Saab, and other assets in attempts to

restructure. The stock was removed from the DJIA and S&P 500.

The US Treasury and the Canadian government financed a new company to purchase the

operating assets of the old GM company in bankruptcy proceedings.


6/62

Key Statistics

5

GMNA58%GME

14%

GMIO17%

GMSA10%

GMF1%

Revenue by segment

6953

-17972191

271744

8362

GMNA GME GMIO GMSA GMF Total

EBIT contribution

Share Price $28.22

Shares outstanding 1.37B

Market cap. $38.56B

Beta 1.69

P/E ratio 9.70x

Forward P/E 8.21x

Dividend yield 0%


7/62

Trading Performance

6

50

60

70

80

90

100

110

120

11/17/2010 3/17/2011 7/17/2011 11/17/2011 3/17/2012 7/17/2012 11/17/2012 3/17/2013

GM Dow Jones Auto Index Ford

GM 83.6

DJI Auto 87.5

F 78.7


8/62

INVESTMENT THESIS

General Motors

7


9/62

Investment Thesis

8

Competitive Positioning New GM releases in past 2 years caught up to competition.

Growth is Driven off of Pent-Up Demand in the U.S

Industry data (average age of cars) favors a pick-up in trucks (13.0 vs. 11.0) where the average transaction

price and margins are higher than passenger cars.

Attractive valuation

GM trades at 8.2x 2013 EPS which is cheap relative to European OEMs trading at 7.91x 2013 EPS and

given the attractive growth prospects for the automotive industry the multiple should trade higher

Our DCF model suggests a $35.95 price-target which implies a 10% 5-year average growth in EPS, which

is not aggressive given that EPS growth will come from increased vehicle sales, upside pricing (mix shift

and new product launches) and lastly cost saving.

We have a 2013 year end price target of $35.00 (25% upside) applying a 10x PE multiple to our $3.50

EPS target.

Where we differ from consensus

USA: Higher than consensus in the short-run, but we do not foresee US to grow past 16M Auto SAAR on

mid-cycle EPS estimates based on our proprietary model.

China: Bullish estimates in the short to medium term, as we see mitigants to downside from new

legislation.

Europe: Risk of GME operations fully priced in the stock, any positive catalyst provides upside potential.


10/62

INDUSTRY OUTLOOK

General Motors

9


11/62

10

Source: Bloomberg

IndustryTop 5 Regions for Car Sales

#1

- 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000

India

Brazil

Japan

Europe

North America

China

#1

#1

#1

#3 but close to #1 (Fiat)

Global Auto OEMs Market ShareToyota #1 12.6%

GM #2 12.0%VW #3 11.7%

#1

Car Sales


12/62

Industry Overview

11

Source: S&P Industry Survey

Market Share: GM is #1 in the United States in terms of cars sold (M)

20%

16%

13%11%

9%

8%

23%GM (20%)

Ford (16%)

Toyota (13%)

Chrystler (11%)

Honda (9%)

Nissan (8%)

Other (23%)

Trucks are really popular

0.44

0.46

0.48

0.5

0.52

0.54

0.56

0.58

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

TruckMarket

Shareasa

%o

fallvehicles

CarVehicleS

ales,

North

Americain

Millions

Truck % Car Vehicles Truck Vehicle


13/62

Industry Overview

12

Source: Bloomberg

Pent-up demand in the US car industry: The average vehicle sits at 11 years old, 130k miles on the odometer and 15-16 mpg

2001 Ford Explorer 2001 Honda Accord

WHATSON

THEROAD

2001 Ford Taurus

The vehicle parc has aged significantly: By 1.0 years on average to 10.8 over the last 5 years, after only growing 1.0 years

over the previous 10 years

8.00

8.50

9.00

9.50

10.00

10.50

11.00

11.50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US Average Age of Passenger Cars


14/62

Industry Overview

13


Much more pent-up demand in trucks than car

Average age ~ 11

Varied Segment Loyalty Prone to Declining Density Total light vehicles sales down

35% from 2007-2009

Average age ~ 13

Highest Segment Loyalty Geographically Advantaged GM = 41% of pickups on the road Total trucks sales down 49% from

2007-2009 Revival for homebuilding

Financial Impact on GM1) GM has $4,000 ATP gap to Ford2) GM has $2,000 ATP gap to Chrysler3) $2,000 on 1m GM units = $2b opportunity


15/62


16/62

Industry OverviewForecasting U.S. Auto SAAR

15

Source: Desautels Capital Management Estimates

Driver: Housing

Why? Rising home prices make consumers feel wealthier which translates into larger capital outlays such as cars

High Correlations: US Housing Starts vs. US Pickup Sales: 95% Correlation Since 1990 , US Housing Starts vs. US Light

Vehicle Sales: 89% Correlation Since 1990

0

500

1000

1500

2000

2500

3000

Jan-59 Dec-67 Nov-76 Oct-85 Sep-94 Aug-03 Jul-12

Ho

usingStarts

Housing Starts

100

120

140

160

180

200

220

1/1/2000 9/1/2002 5/1/2005 1/1/2008 9/1/2010

S&P/Case Shiller Composite 20 HPI SA

Housing Price Recovery Still a Way to Go We forecast an increase in housing starts to its median


17/62


18/62


17


Driver: Interest Rates (Auto Financing Rates)

Why? As interest rates increase, it becomes more expensive to finance an auto loan

High Correlations: But car companies can artificially manipulate the financing rate by offering incentives

We forecast an increase in interest rates starting in early 2016

0

2

4

6

8

10

12

14

16

18

0

5

10

15

20

Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18

US AUTO SAAR M (LHS) 5-Year Interest RatesR= -0.368


19/62


20/62


19

Based on our forecasting model, we estimate US Auto SAAR to be 15.154M in 2013 and peaking at 17.649M in 2018 before

falling back to down to 16.7M by 2020


8

10

12

14

16

18

20

22

Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18

AUTOS

AAR

(M)

US SAAR Consensus Estimates


21/62

Industry OverviewChina

20

Estimate about 150 per 1000 people by2020. (Currently 60).

o When Korea was near Chinas

current penetration level in 1988,

they went to over 200 in 10 years.

In US, car ownership is >1100 per 1000.

China also lags most ASEAN nations.


22/62

Industry OverviewChina

21

Source: McKinsey & Co.


23/62

22

Dealers are expanding into tier 3 and 4 cities or to the west, which offer higher growth

opportunities than tier 1 and 2 or eastern cities.

The only auto subsidy China offers is for energy-efficient models, where tier 3 and 4 cities

benefit more.

Mitigant to car license system to limit car ownership/traffic congestion.

Industry OverviewGrowth in Tier 3 and Tier 4 cities


24/62

23

Highly correlated to GDP growth. GDP growth drives salaries, which drives personaldisposable income, which drives car sales.

Growth Forecasts (CAGR): 22% CAGR in 2000-2010. Project ~10% CAGR in volume from

2013-2020. In the second phase, penetration should slow partially due to base effect and

partially to congestion and relative saturation in tier-one cities.

Industry OverviewAuto Growth Rates


25/62

Industry OverviewEurope

24

The average driver is driving less . This will likely result in higher vehicle ages on the road (currently at 8.4 years old, but the

U.S. is at 11)

European car makers are trying to compete on price to increase volume

The volume story for the EU is more driven off of scrappage, but we do need see much growth in volume in the next 5

years

Source: Morgan Stanley Research

Auto ownership rates have stopped rising in Europe Miles driven has also peaked for car usage


26/62

COMPANY OUTLOOK

General Motors

25


27/62

Restructuring

Chapter 11 bankruptcy: restructuring and path to profitability

GM cut 17 of its 71 plants in attempts to consolidate production and reduce fixed costs by

$9 billion per year.

Furthermore, 90% of GMs cars will be made from the same core architecture in 2018

compared to 62% currently. This will allow the company to maximize economies of scale and

cut on fixed and variable costs.

Pricing discipline was key as cash rebates, lease promotions, cheap loans and dealerincentives were equal to 8.8% of the average vehicle price, compared to 9.5% for Ford.

Overall, improved pricing resulted in an $8 billion contribution to revenues.

GMs new break-even point for the GMNA division is a level of 10.5 to 11 million cars

sold in North America. Currently, the number stands at 14.5 million, well above the

estimated threshold. Even during the peak of the crisis, annual sales amounted to 10.4 million, showing that GM

will do well even in a nightmare scenario.

26


28/62


29/62

RestructuringBalance Sheet

Tax loss carry forwards

First, because GM had been unprofitable for decades, massive tax loss carry forwards were

accumulated which will prevent the government from collecting its piece of the pie until

2017. GM is carrying forward $45B in losses going forward.

Debt

The balance sheet looks much cleaner after bankruptcy and restructuring, especiallycompared to Ford:

28

GM Ford

2008 2012 2008 2012

Liabilities/Assets 193.50% 75.20% 106.70% 91.40%

Debt/Equity - 43.40% - 644.10%

Debt/EBITDA - 1.9x 19.7x 8.8x

EBITDA/Interest - 17.5x 3.9x 16.6x


30/62

Innovative products

29

2013 Chevy Volt

2014 Chevy Silverado


31/62

Competitive Positioning

30


32/62

Quality

31

Index of perceived quality, based on average ratings from more than 50 consumer reports for2011 models.

Most specifically, the Buick brand ranks second among perceived quality in the US.

62.0

64.066.0

68.0

70.0

72.0

74.0

76.0

78.080.0

82.0

84.0

Source: CIBC World Markets


33/62

Light Trucks

Trucks currently account for 62% of the product mix, while they contribute to approximately70% to 80% of EBIT.

The new revolutionary line of Chevy and GMC trucks will help reverse the negative market

share trend that moved mostly to Chrysler, which updated its line last year.

The many updates to the Silverado and Sierra are new, aerodynamic designs inside and out,

three more fuel-efficient engines, and many other extra features.

Ford will only be releasing its updated versions next year, which will give GM somewhat of afirst-mover advantage, as was the case with Chrysler.

32

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Chrysler Ford General Motors


34/62


35/62

GM FinancingAmeriCredit and Ally Financial International

AmeriCredit acquisition

In 2010, only 4% of GMs sales were to subprime customers, which represent about 40% of

the population.

Compared to an industry average of 21%, GM sold only 7% of its cars through leasing

programs.

AmeriCredit did well even in the financial crisis.

Ally Financial Intl acquisition

Lack of lending control put GM at a 10% to 15% sales gap disadvantage compared to

competitors internationally.

Acquisition compliments efforts to grow market share in countries like Brazil.

Overall, GM can use its financial arm as a tool to fine-tune its global sales strategy.

34


36/62


37/62


38/62

Europe and Opel

Currently, the overall industry outlook is unfavourable and the market is highly pessimisticabout GMs chances to turn around its Opel division.

GM turned down an offer from Magna in 2010 to acquire Opel.

Analysts estimate that Opel reduces GMs enterprise value by -$17 billion.

Potential catalysts?Acquisition: Fiat is rumoured to be interested in the German car maker.

Restructuring: 2 of the existing 11 plants will be closed in the next 5 years (Antwerp,

Belgium and Bochum, Germany), reduced inventory

High brand equity: #3 brand in Europe, very popular in Russia and other Eastern European

countries

37


39/62

RISKS AND CATALYSTS

General Motors

38


40/62


41/62


42/62

VALUATION

General Motors

41


43/62

42

ValuationComp Table

Comparables Table Mkt Cap ($B) Price ($) Debt ($B) Debt/EBITDA Profit Margin (%) ROE (%) P/E 2013 P/E 2014

U.S. Auto Manufacuturers

GENERAL MOTORS 37.99 27.80 5.2 0.15x 3.0 17.1 8.28x 6.42x

FORD MOTOR 49.68 12.95 104.3 7.46x 4.4 36.6 9.38x 7.83x

DAIMLER AG 58.66 54.93 111.7 6.94x 7.5 14.6 8.95x 7.78x

Japanese Auto Manufacuturers

TOYOTA MOTOR 172.5 50.03 148.9 6.05x 1.9 7.2 16.70x 11.54x

NISSAN MOTOR 41.59 9.20 56.2 4.66x 2.4 9.8 10.65x 8.04x

HONDA MOTOR 66 36.43 52.9 4.28x 3.2 8.1 15.34x 10.58x

MAZDA MOTOR 8.25 2.75 8.8 7.87x 3.9 7.6 26.47x 10.66x

SUZUKI MOTOR 12.59 22.44 5.1 1.93x 1.1 6.2 16.16x 12.73x

MITSUBISHI MOTORS 5.97 0.99 3.7 2.65x -3.0 29.90x 11.74x

Japanese Auto OEMs Average 19.20x 10.88x

European Auto Manufacuturers

VOLKSWAGEN 89.75 188.60 155.3 4.82x 3.4 32.2 6.76x 5.85x

RENAULT 18.59 62.88 43.6 8.18x 5.0 7.3 6.15x 4.89x

BAYERISCHE MOTOREN WERKE 56 87.32 91.7 5.79x 5.8 17.8 8.70x 8.43xPEUGEOT 2.58 7.27 43.0 14.09x -16.2 -42.4

FIAT 6.68 5.34 36.8 3.51x 0.5 3.9 10.01x 6.04x

European Auto OEMs Average 7.91x 6.30x

Korean Auto Manufacuturers

KIA MOTORS CORPORATION 20.09 49.53 3.6 0.85x 8.2 25.5 5.90x 5.34x

HYUNDAI MOTOR 43.96 199.55 42.5 4.13x 10.1 21.0 6.42x 5.89x

General Motors 37.99 27.80 5.2 0.15x 3.0 17.1 8.28x 6.42x

Global Auto OEMs Average 11.5 12.52x 8.29x

Japanese Auto OEMs trade at a higher premium but P/E multiples come down in 2014

GM trading as low as European Auto OEMs, is this justified?


44/62


45/62


46/62


47/62


48/62

RECOMMENDATION

General Motors

47


49/62

Recommendation

The Industrials sector recommends a BUY at $28.00 which is 8.2x 2013 EPS. We have a2013 year end price target of $35.0 applying a 10x PE multiple on our 2013 EPS estimate of

$3.50.

We recommend liquidating our entire position in CAE and be replaced with General Motors.

Going forward, Conrad Industries and General Motors would represent our two core

holdings, positions with which we feel confident that we will outperform our sector

benchmark.

48


50/62


51/62


52/62

51

GM quickly turned around with innovation and matched its products with those of the

competition.

While Ford moved towards creating global cars like the Focus that would be attractive to

markets like Europe, GM stuck with making larger, more comfortable cars that are appealing

to the American consumer.

Chevy Cruze Ford Focus

Fuel efficiency: 28/42 mpg 27/38 mpg

Safety rating: 5 stars 4.33 stars

Price: 19,510$ 18,918$

Quality ranking: 64 65

AppendixProductsCompact Car


53/62

52

Source: Credit Suisse

Huge divergence in-between consensus and market implies EPS growth rates: Larger margin of safety for GM

GM Tax Rate consensus is 20% (Source: Credit Suisse)

AppendixValuation


54/62


55/62


56/62


57/62

56


Historical Sales Trends

2,9562,073 2,211

2,504

1,942

1,630 1,9052,111

1,448

9271,080

1,362

1,429

1,151

1,231

1,147

2,218

1,770

1,764

1,645

952

770

9091,043

2,251

2,081

2,455

2,924

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2008 2009 2010 2011

GM (20%) Ford (16%) Chrystler (11%) Honda (9%) Toyota (13%) Nissan (8%) Other (23%)

Otherincrease fromHyundai + Kia

AppendixIndustry Overview


58/62


59/62

58


-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

10,000,000

11,000,000

12,000,000

13,000,000

14,000,000

15,000,000

16,000,000

17,000,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

European Passenger Cars New RegistrationsWestern Europe Total Eastern Europe

AppendixEurope


60/62

59

Regression models


Regression Outputs YoY increase

Year Interest Rates

Unemployment

Rate

New Home

Sales

Housing

Starts Model 1 Model 2 Model 3 Model 4 Average Consensus YoY increase

2013 0.76000 7.7 450.0 940 16.428 13.7238 15.118 15.206 15.154 15.1

0.76000 7.45000 481.25000

2014 0.8 7.2 512.5 1034.000 16.920 14.3513 15.808 15.828 15.767 15.6 4.05%0.76000 6.90000 543.75000

2015 0.8 6.6 575.0 1137.400 17.372 15.0688 16.481 16.372 16.343 3.65%

1.01000 6.39000 606.25000

2016 1.3 6.2 637.5 1251.140 16.890 15.4768 17.426 17.158 16.906 3.44%

1.51000 5.97000 668.75000

2017 1.8 5.8 700.0 1376.254 16.377 15.8848 17.089 18.073 17.343 2.58%

2.01000 5.55000 700.00000

2018 2.3 5.3 700.0 1513.879 15.541 16.1153 17.100 18.792 17.649 1.77%

2.51000 5.27000 700.00000

2019 2.8 5.2 700.0 1438.185 14.676 16.0938 16.911 17.945 17.022 -3.55%

2.80500 5.35000 700.00000

2020 2.9 5.5 700.0 1400.000 14.485 15.79725 16.250 17.793 16.766 -1.50%

AppendixIndustry Overview


61/62

60

Source: Bloomberg

70

75

80

85

90

95

100

105

110

115

1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 1/1/2013

USD/JPY

Since September 2012, the Yen has devalued 19%; however, it is still strong when looked at on a 5 year basis Pressure on pricing is down: Weakening yen could tempt Japanese OEMs to turn up incentives; however, the impact is likely

to be muted as a significant part of Japanese sales in the US are sourced from the US

AppendixForecasting prices


62/62

general motors internal initiation (buy-side) report

Documents