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Why Is Buffett Buying General Motors Company (GM)?

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Interesting news for auto-watchers: Berkshire Hathaway Inc. (NYSE:BRK.A), the savvy conglomerate controlled by the great Warren Buffett, disclosed in an SEC filing on Thursday that it had bought 10 million shares of General Motors Company (NYSE:GM) .

That comes on top of another 15 million shares of GM Berkshire bought earlier in 2012, bringing the total value of the company’s investment in the General to nearly $700 million as of Thursday’s close.

That’s not chump change, even by Buffett’s standards. What might Berkshire be thinking?

General Motors Company (NYSE:GM)Is GM a value stock?
The obvious guess for anyone who knows anything about Buffett’s career is that he (or, more likely, Berkshire’s new portfolio managers, Todd Combs and Ted Weschler) thinks that GM is undervalued at current price, particularly when viewed in the context of where the business is likely to go over the next several years

I happen to agree, which is why I own (somewhat less than 25 million shares of) GM stock myself. But it requires some explaining, because GM isn’t really undervalued by the most basic traditional measures. Its current price-to-earnings ratio is around 10.4, roughly the long-term norm for auto stocks.

But it may well be undervalued after taking into account the huge amount of room for improvement available in GM’s global operations — and current management’s determination to make those improvements and realize GM’s full value.

Big gains await GM’s Europe turnaround
GM lost $1.8 billion in Europe last year and expects significant losses to continue for at least another year or two. The problems are a lot like those GM had in the U.S. a decade ago: too much production capacity, too-high costs, and declining sales — in the case of Europe, because of a deep, protracted recession.

But GM CEO Dan Akerson has set in motion a major effort to overhaul GM’s sick European operation. A new management team is in place, a factory has been closed, another has been sold, a cost-saving joint-venture with French automaker PSA Peugeot Citroen has been established, and a bunch of new products are coming.

GM CEO Dan Akerson reiterated on Thursday that he expects GM Europe to break even on a pre-tax basis by “mid-decade”. Consider that GM made $6.19 billion in 2012. If GM had simply broken even in Europe last year, that number would have jumped to about $8 billion before taxes — with no other changes or improvements to GM’s global operations.

And the thing is, other changes and improvements are already happening.

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