Author Topic: GM - General Motors  (Read 368166 times)

vinod1

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Re: GM - General Motors
« Reply #1390 on: May 17, 2017, 08:36:19 AM »
If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

It is not equity that is funding the cash.

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

cmlber

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Re: GM - General Motors
« Reply #1391 on: May 17, 2017, 09:01:36 AM »
If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

It is not equity that is funding the cash.

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

Vinod

Money is fungible. 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis. 

vinod1

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Re: GM - General Motors
« Reply #1392 on: May 17, 2017, 11:22:34 AM »
If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

It is not equity that is funding the cash.

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

Vinod

Money is fungible. 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

No disagreement there at that level of buyback.

A cash level of about 6% of sales for cash drain during a recession + a couple of billion $ for cash needs at cyclical lows should be more than enough. That frees up about $7 - $8 billion that can be used to buy back stock.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

Spekulatius

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Re: GM - General Motors
« Reply #1393 on: May 17, 2017, 04:24:35 PM »
If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

It is not equity that is funding the cash.

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

Vinod

Suppliers will see the debt too and probably demand quicker payment or keep Gm on a shorter leash in terms of payment terms. GM financial will find it tougher to finance itself. The gains from issuing debt will not be as large as they seem.

Money is fungible. 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.
To be a realist, one has to believe in miracles.

cmlber

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Re: GM - General Motors
« Reply #1394 on: May 17, 2017, 06:58:25 PM »
Suppliers will see the debt too and probably demand quicker payment or keep Gm on a shorter leash in terms of payment terms.

Take (A/P - A/R)/Shipments for GM (with $12 billion in net cash) and FCAU (with $5 billion in net debt).  FCAU is 20% higher than GM.  Could be some timing randomness comparing Dec 31st, but your point doesn't appear to be true in the data.  FCAU has almost as much cash as GM, hence why suppliers wouldn't be concerned about getting paid, just has the cash financed with debt rather than equity. 



Dalal.Holdings

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Re: GM - General Motors
« Reply #1395 on: May 18, 2017, 06:08:58 AM »
Bloomberg piece on GM worth reading: "At Mary Barra’s GM, It’s Profit Before All Else"
https://www.bloomberg.com/news/articles/2017-05-18/at-mary-barra-s-gm-it-s-profit-before-all-else

Highlights (compare what's below to GM's competitors--esp F and FCAU):

Barra flew to the headquarters of General Motors India with a message the team didn’t want to hear. She told Executive Vice President Stefan Jacoby, who runs the carmaker’s international businesses, that a planned $1 billion investment in India might be a bad bet....By April, Barra had a deal to sell Opel to Peugeot. She also decided not only to scrap the $1 billion investment in India but to stop selling Chevrolet models in the market altogether.

“We aren’t going to win by being all things to all people everywhere. It’s not the right strategy.” -Barra

The problem with all those markets is that profit margins either don’t exist or are nowhere near what GM wants, Ammann says.

When Ammann was chief financial officer from 2011 to 2014, GM installed a system to track the profits of every model in every market. In India, automakers sold almost 3 million cars last year. But GM has just a 1 percent market share, and the cars delivered very little profit, he says. “In the places where we decide to put resources, we want to win,” says Ammann. “In others we find a way to release resources or exit.”

despite all the talk among management gurus about the importance of maintaining beachheads in the so-called BRIC countries, meaning Brazil, Russia, India, and China. One reason: Barra just doesn’t buy the notion that selling in all the emerging markets is a requisite for success.

“She’s absolutely right,” says Maryann Keller, an auto analyst who has written books on GM. “Who cares about being global? The automakers have chased these victories for years, and many of them were Pyrrhic.”

Because of dual-class stock or concentrated shareholdings, both the Ford family that controls Ford and the Toyoda family that runs Toyota have the clout to fend off activist investors. Barra has no such defense.

To keep profits high, GM has pulled back from low-margin businesses including selling cars cheaply to rental fleets. Through April, GM had sold 11 percent fewer rental cars than at this time last year and trails Ford, Nissan Motor Co., and Fiat Chrysler Automobiles NV in that business, according to Keller.

There’s an added benefit to chopping laggard businesses, Barra says: GM’s culture was notoriously tolerant of losers, and her recent cutting of the chaff has gotten the attention of the troops. Says Barra: “It has driven accountability, because the team knows we’re serious.”
« Last Edit: May 18, 2017, 06:12:33 AM by Dalal.Holdings »

atbed

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Re: GM - General Motors
« Reply #1396 on: May 18, 2017, 08:09:52 AM »
If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

It is not equity that is funding the cash.

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

Vinod

Money is fungible. 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

No disagreement there at that level of buyback.

A cash level of about 6% of sales for cash drain during a recession + a couple of billion $ for cash needs at cyclical lows should be more than enough. That frees up about $7 - $8 billion that can be used to buy back stock.

Vinod

I wish they canceled the dividend and the stock fell, allowing even cheaper shares to be bought back.

fareastwarriors

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Re: GM - General Motors
« Reply #1397 on: May 18, 2017, 08:43:08 AM »
GM will cut operations in India, South Africa

http://www.reuters.com/article/us-gm-restructuring-idUSKCN18E0P3

fareastwarriors

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Re: GM - General Motors
« Reply #1398 on: May 18, 2017, 08:46:22 AM »
If the 20 billion (or 18 ex the Euro mkt sale) is truly what's needed then take out long term debt to fund a big buyback. You will lock in low interest rates and retire stock that is yielding 4-5% annually.

Exactly... You can keep $20 billion in cash sitting in a bank account, which is a sensible thing to do, but why does that $20 billion need to be equity?  You can borrow money at probably 5% and use it to retire stock yielding 20%.  As long as it's long term, it still gives you the liquidity you need to survive a downturn.

It is not equity that is funding the cash.

Accounts Payable is $17 billion more than Accounts Receivable. So $17 billion is essentially a loan from its suppliers. A form of debt. 

Vinod

Money is fungible. 

You can say it is working capital funding the cash balance, but there is also $46 billion in shareholders equity.  Bottom line is, when your stock is trading at 5x earnings and you can borrow at MSD% fixed for long periods of time, it doesn't make any sense to have so much net liquidity when you can achieve the same goal (a cash cushion) with less equity. 

They have $23B in cash and $12B in long term debt.  GM Corp debt maturing 2035 is yielding 5%!  Raising another $10B would obviously raise that, but surely you don't need 20 years of term for what is basically a really expensive line of credit to provide short-term liquidity for a couple years in the event of a crisis.

Let's say GM earns $9 billion in 2017 (consensus).  There are 1.532B shares outstanding.  A $10B debt-financed buyback would reduce shares outstanding to 1,226MM, and increase after-tax interest expense by $390MM (assuming 6% interest).  $8,610MM / 1,226MM = $7.02/share.  We've just increased EPS by ~20% and had very limited impact on the resiliency of the business in a crisis.

No disagreement there at that level of buyback.

A cash level of about 6% of sales for cash drain during a recession + a couple of billion $ for cash needs at cyclical lows should be more than enough. That frees up about $7 - $8 billion that can be used to buy back stock.

Vinod

I wish they canceled the dividend and the stock fell, allowing even cheaper shares to be bought back.

That is simply not going to happen. I know as value investors we love buybacks at depressed valuations but we have to be realistic. Many investors like the dividend...
« Last Edit: May 18, 2017, 08:54:43 AM by fareastwarriors »

vinod1

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Re: GM - General Motors
« Reply #1399 on: May 19, 2017, 12:15:18 PM »
Almost all the companies that I follow are at elevated valuations. The one exception had been GM. So I had taken a fresh look to see if it makes sense to increase my exposure but decided to hold tight.

I put some of my thoughts on the long term technological risks into my investment thesis on GM. It is a bit long to post on a thread so I am posting in here:

http://vinodp.com/blog/?p=48

None of it is really original and most of you are well aware of these. It only focuses on only some set of risks.

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger