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%.
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.