General Motors


General Motors (GM) is the world’s largest auto manufacturer. Historically it has been a badly run company with poor returns. In 2005-2009 it lost a total of $88 billion(!) and eventually went bankrupt. But the bankruptcy was not all bad. When GM was listed at NYSE again in 2011 it had c. $70 billion less in net debt, improved gross margins from c. 4% to c. 13% and decreased fixed costs from $16 billion to $12 billion. For the first time in decades it could now successfully compete on a global level.

Everything was going as planned for GM until early this year. What started with a small recall of 800,000 cars in February has now escalated to 40 different recalls for a total of 29 million vehicles, making it the largest recall in history. Their stock price has subsequently fallen more than 30% to around $30 per share. But as I wrote in the previous letter: when there is blood in the streets, buy stocks. And I have used this price fall as a buying opportunity. Because despite the headline news I believe that GM is cheap and has good prospects.

I think it is highly likely that GM will manage to handle this recall crisis without permanent damage to its business. If you look back at large recalls in history, they have had fairly low impact on market shares. Actually, GM’s market share is basically unchanged compared to a year ago before the recalls started. It also gives me comfort that GM has a solid balance sheet with $26 billion in cash. They can easily handle all worst case scenarios in terms of litigation and recall costs.

Looking past the recall I think that pent-up vehicle demand in developed markets and growing demand in emerging markets will drive sales the coming years. When GM reaches its mid-cycle margin in a couple of years I think that the company will earn c. $5 per share which should indicate a stock price of around $50 or higher.