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General Motors Company (GM), Ralph Lauren Corp (RL), Diageo plc (ADR) (DEO): The Gatsby Portfolio

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General Motors (GM)If Jay Gatsby were alive today, three companies that could provide him with the essentials for his lavish lifestyle include General Motors Company (NYSE:GM)Ralph Lauren Corp (NYSE:RL), and Diageo plc (ADR) (NYSE:DEO). If Gatsby was alive today he might be driving a yellow Corvette with Daisy, talking with politicians about bailing out General Motors Company (NYSE:GM), wearing clothes under the Chaps, Polo Ralph Lauren Corp (NYSE:RL) and Club Monaco brands, and serving Diageo plc (ADR) (NYSE:DEO) drinks at his parties. For the regular investor, these companies offer attractive investment opportunities.

Valuation and fundamentals

General Motors Company (NYSE:GM), Ralph Lauren and Diageo plc (ADR) (NYSE:DEO) are global leaders in car manufacturing, upscale clothes design and premium alcohol production and distribution. Diageo is based in the United Kingdom while General Motors Company (NYSE:GM) and Ralph Lauren Corp (NYSE:RL) are headquartered in the United States. Regardless of their primary location, each company operates on a global level. Below is a table with valuation and fundamental measures for each company.

GM RL DEO
Market capitalization $45.9B $17.2B $77B
Enterprise value (EV) $40.1B $15.9B $89.5B
Price-to-CFO 5.2 17.2 20.8
Price-to-earnings (PE) (2013) 10.2 23.3 19.2
Price-to-sales 0.3 2.5 4.6
Price-to-book value 1.7 4.5 8.1
Employees 213,000 25,000 25,700
International revenue (2012) 44.2% 37.7% 71.9%*
1-year total return 55% 29% 28%

Source: Capital IQ, Thomson Reuters, SEC filings, authors calculations; EBITDA – earnings before interest, tax, depreciation, and amortization, CFO – cash flow from operations.*World ex. U.S. and Canada

As seen from the table above, GM has the most attractive valuation based on PE and price-to-CFO ratios. If we look at each company’s book value, GM also seems to have the lowest price-to-book value as well as price-to-sales value.

It seems that Ralph Lauren Corp (NYSE:RL) is valued for a sustained growth and is the riskiest stock. Diageo is a defensive stock as people drink alcohol regardless of the economic environment so its valuation could be closer to its fair value. In addition, Diageo plc (ADR) (NYSE:DEO) has significant debt as its enterprise value exceeds its market capitalization. Often, reasonable amount of debt improves equity returns as it provides additional, tax advantaged, capital for the company. Finally, General Motors Company (NYSE:GM) is a recovery story. With new car, truck and SUV models on the horizon and the average car age in the U.S. reaching new highs, GM seems also like a stable investment.

Recent developments

GM will be launching new generation full-sized pickups (Chevy Silverado and GMC Sierra) in the next few months that should bring proof of its “innovation and ingenuity” capabilities in the auto industry. The shares could see pressure from the U.S. Treasury recently announced plans to sell in the open market the remaining 241.7 million General Motors Company (NYSE:GM) shares it holds. Also, GM’s plan to invest an additional $5.2 billion in Opel (its European brand) through 2016 to support new model launches could be risky. Opel’s loss in Europe has been nearly $20 billion since the 1990s and $1.8 billion in 2012. However, Europe is a key market for design, development and sales. Similar to Jay Gatsby, GM CEO Dan Akerson is known for hiding his true identity and walking anonymously in dealerships pretending he is buying a car.

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