Author Topic: GM - General Motors  (Read 593978 times)

cmlber

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Re: GM - General Motors
« Reply #1730 on: September 20, 2019, 03:33:34 PM »
Quote
I also account for the net pension liability as something close to, but not quite as "bad" as, debt in adjusting my EV.

In my opinion, pension liabilities are way worse than debt. Essentially it is debt with a high coupon (the expected rate of return 7-8%) and a maturity of 30 years or so. Debt is easy and cheap now, pension are not. Pension liabilities actually get worse as interest rate go lower.

The coupon on it is not 7-8%, itís 4%, which is lower than GMs longer term bonds yield.  And just as the liability gets worse as rates go lower, it gets better as rates go up.  In the long run that aspect of it is a wash imo.  Itís also somewhat naturally hedged since rates going down means new cars are easier to finance.


Cigarbutt

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Re: GM - General Motors
« Reply #1731 on: September 20, 2019, 07:03:45 PM »
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I agree if you're valuing GM off EPS, then the expected return matters because as you said it impacts "earnings."  Looking strictly at EPS, in part 1 of your question, you and I agree that at some point EPS will be lower in the future to account for "over-earning" in the past with an unrealistic expected return on plan assets. 

But I don't value GM on EPS but instead value it off FCF.  I also account for the net pension liability as something close to, but not quite as "bad" as, debt in adjusting my EV.  It's like low quality float, it has a reasonably low cost (the discount rate) but never really matures so long as the business continues to operate and you're well funded to the point of not requiring mandatory contributions.  If you start the year 92% funded with an expected return of 7% and only earn the discount rate (plus service cost / benefit obligations to be exact, but that's negligible in this case), you'll still end the year 92% funded.  So to the extent a 92% funded plan doesn't require mandatory contributions, it has no cash flow implications to earn less than the expected return so long as you're earning above the discount rate.

My main point to begin with though was that the expected return on plan assets isn't used to calculate the net liability on the balance sheet.
First, I referred above to the interest cost on net liability which is IFRS. My mistake.

I see better what you're getting at. In the end, expected returns are defined above the discount rates in order to meet obligations when they come due so there are also cash flow implications but I understand your point about earning around the discount rate without lowering the recorded funded status, especially with the difference between the two rates having become narrower lately.

Your view of the pension plan as cheap debt needs to be reconciled with the fact that extra-contributions are typically required in times of the cycle where operating cash flows get lower. And GM's pension plans remain significantly under-funded at this point of the cycle and as Mr. Buffett noted about large US companies in his letter to Kay Graham about pensions in 1975, the pension fund assets' absolute value (largely off-balance sheet) can reach levels comparable to the market value of whole companies (today's market cap: 53.4B and market value of plan assets end 2018: 69.6B). I was following GM in the early 2000's and they made unusually high contributions then and this was accompanied by significant credit downgrades.

Even if you don't value GM using EPS, many market participants do and I find it intriguing that GM plays this game also. Mr. Buffett had voiced general concerns in his 2007 annual letter. Since then we've had the financial crisis which was very detrimental, among others, to defined-benefits pension plans many of which became very significantly under-funded. Interestingly, accounting rules were introduced to make it easier for companies to deal (defer correction) with pension deficits. Unfortunately, we have a new normal where underfunding is the norm.
https://davidgcrane.org/?page_id=702
"the chickens wonít come home to roost until long after they retire."

Cigarbutt

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Re: GM - General Motors
« Reply #1732 on: September 22, 2019, 08:08:27 AM »
...
But I don't value GM on EPS but instead value it off FCF.  I also account for the net pension liability as something close to, but not quite as "bad" as, debt in adjusting my EV.  It's like low quality float, it has a reasonably low cost (the discount rate) but never really matures so long as the business continues to operate and you're well funded to the point of not requiring mandatory contributions.  If you start the year 92% funded with an expected return of 7% and only earn the discount rate (plus service cost / benefit obligations to be exact, but that's negligible in this case), you'll still end the year 92% funded.  So to the extent a 92% funded plan doesn't require mandatory contributions, it has no cash flow implications to earn less than the expected return so long as you're earning above the discount rate.

My main point to begin with though was that the expected return on plan assets isn't used to calculate the net liability on the balance sheet.
This follow-up is related to potential cashflow implications that can occur when pension plans remain under-funded. The pension issue for GM has come down significantly but the deficit is still high when compared to other cash flows. Something that does not show up clearly in annual disclosures is that the slope of the curve describing potential cash contributions to the plans versus funding level changes significantly when the funding is around 85 to 90% and below.
Some numbers:
                                               2014      2015      2016      2017      2018
Annual cash contributions (B)      0.9        1.2         3.1         1.2        1.7
% level funding                           77         78         83           85         86

With an overall 86% funding level at end of 2018, one could evaluate the potential cash flows necessary to get funding to 100% in the next few years (conservative view). But like GM has been promoting, one could discount this over a very long time, could continue to  expect minimum contributions and could hope that expected returns will eventually close the gap but the present situation exposes to the risk related to the changing slope referred to above if realized returns do not match expectations. Historical review of GM's checkered past is useful here.

If anybody is interested, the changing relationship between funding levels and potential cashflow implications is also found in nature with the hemoglobin curve. Hemoglobin carries most of the oxygen in the blood. Healthy people typically have saturation levels close to 100%. Nature has made it that the oxygen pressure does not change much down to 90% saturation. This may create a false sense of security because once hemoglobin saturation goes below 90% the drop in oxygen pressure drops significantly. Post-mortem analysis spends some time about the period when saturation stood at around 90%. But typically, the key fundamental question is to answer why the 90% saturation level was not dealt with when it could.

SharperDingaan

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Re: GM - General Motors
« Reply #1733 on: September 22, 2019, 01:43:18 PM »
Look closer at the PVBO.
A high proportion of retirees are close to end-of-life, implying higher run-off of the BO. New additions may have higher pensions, & live longer - but it is cumulatively not enough to fully offset that higher run-off. Shrinking BO, shrinking PVBO

For the most part the BO is not fully inflation indexed.
Therefore the discount rate should be the long-term discount rate + inflation. And if they can partially immunize the PVBO with something earning more than that, the discount rate rises even further. Additional PVBO shrink.

Look at the asset quality.
If the long-lived asset has a federal guarantee, it's appropriate. But if that long-lived asset also has equity participation (convertible debenture), at some point the asset value will exceed the expected - and produce pension income. It is a simple matter to repackage federal bailouts, as guaranteed conv debs, and resell them to DB pension plans.  PVBO shrink through pension income.

Not as negative as many might like to think.

SD
« Last Edit: October 01, 2019, 07:59:31 AM by SharperDingaan »

JRM

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Re: GM - General Motors
« Reply #1734 on: September 22, 2019, 02:20:02 PM »
My understanding is after the bailout part of the negotiations with the union resulted in new hires receiving a defined benefit retirement option instead of a traditional pension. 

Cigarbutt

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Re: GM - General Motors
« Reply #1735 on: September 22, 2019, 08:08:59 PM »
^For about the last twenty years, GM has been transitioning away from defined benefit plans and has moved towards formulas such as defined contribution plans so the pension plans will become essentially run-off entities. However, even if the program is 'mature', just like in insurance run-off books of business, these plans are very long-tailed and the liabilities are still huge. Something like 50% or more of eligible workers have reached the vesting period or are retired but, actuarially speaking, these people expect the contracted obligation to be honored for a very long time. This potential problem is not going away anytime soon.

The trend of moving away from defined plans started before the 2007-9 financial crisis but the episode accelerated the changes. Some suggest (a view I agree with) that the public bail-out influenced the priority of previous pension participants over new hires. The risk of 'adverse development' on the pension liability is limited versus pension participants due to the run-off nature of the plans.

However, there is still the discount risk (in addition to the expected return risk described before) that needs to be looked at. In the last 3 years, looking at GM and comparing to various surveys, it appears that GM is using a relatively high number. Since Jan 2019, the Baa yield in the US has gone down by 125 basis points. Such a move, even if very large, does not mean that the discount rate used at the end of this year will come down a lot due, in large part, to the leeway that keeps getting renewed and that allows companies to look back for a specified 25-year period (period when rates were higher) in order to come up with a "smoothed" number but the liability number is so large that even a small change in the discount rate could have a huge impact on the funded status. Also, looking back to 1982 (37 years ago!) and smoothing out the noise, this is pretty much a straight line down and we just had an official tweet suggesting that negative rates should be considered, if not promoted.

It looks like GM meets an unexpected and perfect storm (lower interest rates, lower markets, more difficult core business conditions) every few years and, retrospectively speaking, the pension issue has exacerbated other problems and I would bet that this will continue to be an occasional nagging issue even if of smaller relative magnitude.
« Last Edit: September 22, 2019, 08:11:57 PM by Cigarbutt »

JRM

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Re: GM - General Motors
« Reply #1736 on: September 23, 2019, 11:06:52 AM »
Thanks for the info Cigarbutt.  I meant to say they moved new employees from a defined benefit plan to a cash balance plan. 

Gregmal

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Re: GM - General Motors
« Reply #1737 on: October 02, 2019, 12:41:36 PM »
So sales are dropping, the corrupt union is costing the company billions, and the share price is a hair from the IPO price again. Outside of Radman who's loving his value investor street cred here, is there any argument Barra is the right person for the job anymore? She's not delivering on anything and one we're one poor earnings away from $30 and being in Ford territory. Additionally, I saw a note the other week I believe for Adam Jonas about the Waymo valuation being substantially scaled back. Not that Cruise was ever that lofty, but if the bubble for those types of companies is deflating, the window to IPO Cruise is closing...fun times being a GM bagholder.

JRM

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Re: GM - General Motors
« Reply #1738 on: October 02, 2019, 02:33:29 PM »
Of course it had to be Softbank that invested in Cruise with an implied valuation of $19B.  The investments in Maven and Lyft appear to be poor allocation decisions.  The UAW union strike is ridiculous.  They were the only ones left standing after the bankruptcy and bailout and now they are on strike 10 years later. 

RadMan24

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Re: GM - General Motors
« Reply #1739 on: October 04, 2019, 05:03:57 AM »
Of course it had to be Softbank that invested in Cruise with an implied valuation of $19B.  The investments in Maven and Lyft appear to be poor allocation decisions.  The UAW union strike is ridiculous.  They were the only ones left standing after the bankruptcy and bailout and now they are on strike 10 years later.

Media doesn't care about that. Shareholders were wiped out. GM still pays way above peers, but the temp work is contentious. I'm not sure how they tackle that issue.