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Analysis: GM Sheds 'Government Motors' Label, Now What?


The automaker has come a long way since the financial crisis. And with the exit of the government, the road ahead looks smooth.

It's hard to forget the eerie and vulnerable days for General Motors (NYSE:GM) during the automotive industry crisis of 2008-2009. GM couldn't manage to stand on its own four wheels and was veering toward bankruptcy when an Obama-appointed SWAT team swept in and hatched a quintessential plan for the ailing behemoth: Through a novel use of the bankruptcy code, the company was saved by segregating and spinning out its valuable assets, while Washington furnished $49.5 billion in taxpayer funds to make sure the company was viable.

However, the bailout wasn't enough for GM to stay solvent, at least in the short term, so the automaker was forced to issue an IPO in 2010 in the hopes of drumming up a rescue operation. The IPO at that time was only possible because investors knew it was backed by the full faith and credit of the US and Canadian governments, which collectively owned 72.5% of the automaker.

The pejorative Uncle Sam label didn't hurt the company, and it quickly gained a strong foothold in the US and started focusing resources on its core brands, which boosted its sales.

General Motors has come a long way since its dreary days during the financial crisis. The new GM now has a much-improved balance sheet, competitive cost structure, and a significantly lower risk profile. The automaker has made big strides in rebuilding its name and has posted profits consistently since its IPO in 2010.

Most recently, GM reported strong earnings for Q3 2013. Adjusted earnings came in at $0.96 per share, surpassing consensus estimates of $0.91 per share and $0.03 higher when compared to Q3 2012. Additionally, revenue increased to $39 billion from $37.6 billion in Q3 2012.

General Motor's performance in North America was particularly commendable:
  • Operating earnings soared 27% to $2.19 billion, exceeding expectations of $2.13 billion.
  • Margins jumped to 9.3% vs. 7.7% in Q3 2012 -- the highest in two years.
European recovery was also on track:
  • GM cut losses by more than half to $214 million in Q3 2012 vs. $487 million in Q3 2012, beating analyst expectations for a loss of $268 million.
  • $4.86 billion in revenue was the highest (year-over-year) quarterly result in two years. Furthermore, the company reiterated its prior forecast of turning a profit in Europe by 2015.
However, overseas markets proved to be an overhang for General Motors. Earnings in 2013's Q3 in its Asian division, which includes China, fell to $299 million, down from $761 million in Q3 2012.

Despite weakness abroad, GM has been shining brightly in the US, posting stellar sales figures. For November 2013, GM delivered over 212,000 units, up 13% when compared with Q3 2012, marking the best November for the car maker since 2007.

Market IQ's proprietary fundamental metrics give General Motors a Neutral rating. Market IQ characterizes General Motors as a low quality but high value stock (see below).

Click to enlarge

While revenue growth and financial strength are qualitative strengths for the company, cash-flow growth remains a drag on the quality score.
  • Q3 2013 revenues increased by 3.7% when compared to Q3 2012.
  • GM has an equity-to-debt ratio of 0.5, which is higher than the industry average, implying successful management of debt levels. However, the interest coverage ratio of 0.45 is significantly lower than the industry average of 11.92, indicating the firm's weak ability to meet its short-term debt obligations.
  • GM has seen its net operating cash flow increase by 14% in Q3 2013 vs. Q3 2013. However, despite the increase in cash flow, the growth rate still trails the industry average of 27%.
Based on Market IQ's valuation metrics, General Motors is trading at a discount relative to its peers (see below).

With a relatively cheap multiple of 11 times forward earnings and a low price-to-sales ratio of 0.34, GM exhibits characteristics attractive for value-oriented investors.

Based on the improving outlook of the industry and fundamentals for the company, analysts are optimistic about earnings going forward, expecting the company to earn $3.41 in 2013 vs. $2.93 in 2012. While the majority of investment banks expect GM to outperform, Goldman Sachs (NYSE:GS) is particularly confident about the firm's future, adding the automaker to its "conviction buy" list.

Going forward, the government exit is expected to bode favorably for the automaker as the exit will eliminate the dark cloud of government ownership that has been lingering over the automaker since the bailout, prompting some critics to label the company "Government Motors."

With the government out of the picture, executive compensation can be restructured to better incentivize management to deliver value for shareholders. Furthermore, given that GM has fortified its balance sheet with an approximate cash position of $19 per share, money can be returned to shareholders in the form of a buyback and/or dividend payments.

While investors may be in for a rocky road over the next few quarters mainly due to GM's struggles internationally, a promising vehicle fleet, stellar demand and sales in the US, and strong recovery in Europe are likely to provide a smoother and potentially lucrative ride over the long run.

This article was written for Minyanville by Adil Yousuf of Market IQ.

An integrated solution to help you understand your investment's strengths and weaknesses quickly and effectively, the Market IQ Terminal offers investment analysis and portfolio optimization based on proprietary fundamentals, market sentiment, analyst sentiment, and technical parameters.
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No positions in stocks mentioned.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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