General Motors (NYSE:GM) hit its IPO Price of $33 May 17, 30 months after going public. While business seems reasonably strong in Detroit, there's no guarantee it will stay that way. Is GM a momentum play or should investors stay away. I'll answer both sides of this question.
SEE: Use The Momentum Strategy To Your Advantage
This past week GM introduced its 2014 Chevrolet Silverado and GMC Sierra to favorable reviews. This is notable because these are the first all-new pickups for the company in the past seven years. According to the Wall Street Journal, GM nets about $7,000 in profit per pickup. All signs point to a peak product life cycle where profits and revenues surge. With consumer confidence gaining steam car buying is on the minds of Americans. In fact, the desire to buy a car hasn't been this high since 2005. With the average age of cars on the road at historical highs, it's a perfect storm in a good way.
A discussion about GM's positives must include China where the automaker delivered 816,000 vehicles (a record) in the first quarter, 9.5% higher than in the first quarter of 2012. GM sold 54,000 more cars in China than it did in North America. Regardless of what else happens in the rest of the world, executives at the company have to be excited by the potential gains it will make if China continues to grow and prosper. With 15.2% market share in China, a target of 20% in five years wouldn't be unreasonable given it believes the country will generate 35 million in vehicle sales by the year 2022. Globally, GM increased its global market share to 11.4%, 20 basis points (BPs) higher than in Q1 2012. GM sells more cars globally than Volkswagen (OTC:VLKAY) and Ford (NYSE:F) with only Toyota (NYSE:TM) selling more.
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In December GM repurchased 200 million shares from the U.S. Treasury for $5.5 billion. As a result, the federal government's ownership was reduced to 16.4% of the company. Holding 241.7 million shares as of April 1, 2013, its remaining position is worth $8.2 billion at today's prices. If GM were to buy back the treasury's remaining interest in the company, taxpayers would be out $12.7 billion. That's a lot of money to be sure but considering how many jobs were saved along with the fact that the Department of Defense spent $682 billion in 2012, it's a drop in the bucket. More importantly, it reminded Americans that they still care about manufacturing. You can't put a price on restoring the common man.
As recently as March GM was experiencing rising inventory levels. Credit Suisse analyst Chris Ceraso mentioned this in a note to clients: "While GM's trucks (namely full-size pickups) have been the main focus so far this year, we think investors need to pay close attention to GM car inventories, which have ballooned since September 2012." Ceraso estimated that inventory levels were about 33% higher than normal. While GM's April sales were very robust, I think it's important to keep an eye on this number as we make our way through the summer.
While the government's intervention in GM likely saved Midwesterners a whole lot of grief; its current ownership is putting a damper on investor enthusiasm. After all, who wants to own damaged goods? The government doesn't own anything unless there's something wrong. The loss hurts but in the end it's better for investors if Uncle Sam just walks away. It's time to move on. Not to mention it won't gain admission to the S&P 500 until the Treasury sells its stake. GM didn't buyback any of its stock in the first quarter. If it doesn't do anything in the next second or third, I'd say that's a good indication GM feels its shares are fully valued.
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Some suggest GM loses $49,000 on each Chevrolet Volt it sells. In the first quarter it sold 4,244 of the plug-in hybrid for a hypothetical loss of $208 million. Making matters worse, Tesla (Nasdaq:TSLA) sold 4,750 of its Model S four-door sedan, and they start at $70,000, about $30,000 higher than the Volt. In addition, Nissan's (OTC:NSANY) Leaf is nipping the Volt's bumpers selling 3,539 vehicles in the first quarter. With a starting price of $28,800, it could overtake the Volt soon enough. GM counters that its $1.2 billion spent developing the Volt should be spread over the life of the vehicle and not just on those sold to date. I would agree with that assessment. Having said that, you still have to wonder if it can ever make money on its hybrid. Time will tell.
I've been a big fan of GM's since CEO Dan Akerson took over back in September 2010. In order to make the article balanced I mentioned some negative arguments about GM. But frankly I think it's doing just fine. In April, Jim Grant of Grant's Interest Rate Observer, reckoned that GM's $5 billion in free cash flow (FCF) -a yield of more than 10%- makes it a very attractive investment. At $33, I have no problem recommending its stock. If it drops below $30, I'd load up the truck. Somehow, I don't believe it will.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.