16 Oct BUY: GENERAL MOTORS (NYSE:GM)
I’ve bought 1500 shares of GM at around USD$35/shr. and the investment represents about 7% of the portfolio. Add this holding to shares in Linamar (TSX:LNR) and about 10% of portfolio is in Auto Makers and Parts Suppliers.
The auto companies have come under share-price pressure for a number of reasons:
a) US auto sales are at record highs and most don’t think there will be more growth in the auto market for a number of years.
b) US auto makers have traditionally suffered from very high fixed-costs, murdering their bottom line when sales dropped.
c) Tesla is a leader in electric cars and there isn’t a lot of clarity on what kind of answers GM and the other car makers have in response.
d) Trump’s trade policies.
All fair concerns. However, I’m a value investor, let’s not let all the negatives detract from all of the lovely positives:
a) Domestic auto sales are at record highs, and will decline, however, the economy is healthy and a 5%, even 10% drop is not a disaster. Consider that GM now earns 40% of its sales from overseas (outside North America).
b) GM, like the other big 3 automakers renegotiated labour contracts after bankruptcy in 2009 and their fixed-costs are dramatically lower than conditions in the 90’s and 2000’s. Management feels strongly that GM’s domestic operations remain profitable even if domestic sales fall 30%.
c) Tesla is getting all the headlines right now, however, make no mistake that GM, Ford, FIAT/Chrysler and everyone else will have a response.
d) Trump may destroy NAFTA, and it will inconvenience the auto makers (all of them), however, it’s just an inconvenience.
e) GM has a solid Balance Sheet with just about 10% of their capital funded by debt related to the auto company (the rest relates to the finance unit which is backed by auto loans). The firm has about $25 billion in cash, or about $18 per share.
f) GM will likely earn $6 per share in 2017, and $6 per share in 2018. GM trades at 7x earnings.
In short, I love GM right now.