The Government Is Selling GM, Should You Buy?

General Motors Company (NYSE:GM) and the United States Treasury have announced a plan for GM to buy back 200 million shares of stock at a price of $27.50 per share. This was a moderate premium to yesterday’s close, and currently GM is trading at about $27 per share (up 6% for the day) as the market apparently believes that the government is getting a good deal. While Treasury will still own about 300 million shares- 19% of the shares outstanding after the buyback- the sale at $27.50 more or less guarantees that the government will lose money on its bailout of GM as estimates are it would have to sell its remaining shares at prices close to $70. The Treasury Department also expects that it will manage to sell its remaining shares by early 2014.

Weak auto demand- led by poor macro numbers in Europe- caused General Motors Company’s revenue to increase only 2% in the third quarter compared to the same period in 2011. Earnings actually declined, as they had done in the first half of 2012. Lower net income from North America- and higher net losses from Europe- were offset by earnings turning positive in Asia and growing in other international markets. U.S. auto sales in November were considerably higher than in November 2011, continuing a trend of higher sales for the year, but much of the rebound has come from Toyota Motor Corporation (NYSE:TM) and Honda Motor Co Ltd (NYSE:HMC) recovering from production problems last year due to the Fukushima disaster. GM’s sales for the month were up only 3%, with lower truck sales being countered by higher car sales, and market share slipped to 16.3%.

David Einhorn

GM trades at 10 times trailing earnings, which would be about right if the company managed to hold its earnings steady. However, a number of investors actually expect moderate growth on the bottom line, which would make the company undervalued (and Wall Street analysts agree, going by the five-year PEG ratio of 0.6). General Motors Company was the only non-financial and non-technology company to make our list of the ten most popular stocks among hedge funds for the third quarter of 2012 (see the full rankings). Billionaire David Einhorn of Greenlight Capital presented GM as one of his long stock picks at October’s Value Investing Congress, after having increased his stake by 24% during the third quarter (find Einhorn’s stock picks). Warren Buffett’s Berkshire Hathaway had owned 15 million shares of the stock at the end of September (check out Buffett’s favorite stocks). David Tepper and George Soros were two more billionaires who added shares of GM last quarter.

GM’s closest peer is Ford Motor Company (NYSE:F) which carries a forward P/E of 8 compared to GM’s 7. Ford saw a small decline in revenue in its most recent quarter compared to the same period in the previous year, but also a smaller decline in earnings than GM experienced. As such we can see it getting a small premium to GM, though a low multiple. Of course, a general improvement in the auto industry- which is what many GM investors seem to be depending on- would help Ford as well.

We can also compare GM to Toyota and Honda. These companies, as might be expected, have even higher earnings multiples than Ford but they are still remarkably low, in the 10-11 range. We wouldn’t take the very high recent growth rates at these companies at face value- we’ve already mentioned that they are recovering from the aftermath of Fukushima- but we do think that they will continue improving their net income. Toyota and Honda are certainly safer investments than Ford or GM, and we think that they certainly qualify as good values. Of course, GM can also be compared to auto parts companies such as Delphi Automotive PLC (NYSE:DLPH), since these companies will also benefit from a stronger car market. Delphi carries trailing and forward P/Es of 9 and 8, respectively, and earnings were about flat last quarter compared to the third quarter of 2011. It might be another good value play.

GM is certainly cheap, and certainly cheaper than other automakers. However, it’s a riskier investment than its peers- and its recent financial performance has been poor- and we doubt that it will benefit more than Ford, Toyota, or Honda would from an upturn in the auto market. It’s probably best to buy either Toyota or Honda knowing that it’s a good value even if demand continues to be mediocre.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Biggest Airports in the World

The 5 Most Gang Infested Cities In America

The 34 Smartest Countries in the World

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!