At the 2012 Invest for Kids conference, Frank Brosens of Taconic Capital touted General Motors Company (NYSE:GM) as his top stock pick. Brosens’ biggest catalyst for owning GM is that the “Treasury will now sell their 32% stake, at which point management will pay out $20 billion of stale cash to shareholders”. Founded in 1999, Taconic is a multi-strategy hedge fund with over $9 billion of assets under management. Brosens, a former Goldman Sachs partner, co-manages Taconic with Ken Brody, also a Goldman alum. Check out all of Brosens’ newest stock picks.
Brosens describes GM as having at least three distinct drivers that will push the stock higher. The first being strong fundamentals in 2013, the second being the sale of stock by the Treasury, and the final catalyst being “smart” capital expenditures. Brosens also spoke about the pent up demand in the market that would allow car companies including GM, to perform well regardless of the economy. This is in part driven by the fact that the average age of cars on the road is close to 11 years old. A renewed interest in CapEx and vehicle releases will also be a key player in growth, where Brosens breaks down the last two big truck releases for GM. In 1998 GM gained 8% in market share, and in 2006 gained 4% after new truck releases.
Other major car manufacturers that GM competes with includes Ford Motor Company (NYSE:F), Tesla Motors Inc (NASDAQ:TSLA), Honda Motor Co Ltd (NYSE:HMC) and Toyota Motor Corporation (NYSE:TM). Weakness in Europe and South America should drag Ford’s revenues down 4% in 2012 from 2011, and the financial services segment is also expected to see profit decline. Ford is expected to see declining market share in 2012 as Japanese auto manufacturing and inventories return to normalized levels. Ford will also face issues that come along with restructuring, as it looks to close at least one European manufacturing operation given it has seen an over 20% decline in car volume sales in Europe since 2007. Check out whether Ford is a buy after recent earnings.
Tesla is the electric car manufacturer that has a lot riding on its Model S, the first premium luxury sedan vehicle to come to market. The electric car company is expected to finally start reaping some of its harvest next year by actually posting positive earnings. Next year EPS is expected to be up 100% from this year.
The two largest Japanese car manufacturers, Honda and Toyota, have been eating into GM and Ford’s market share over the last several years. Honda saw the Japan crisis hurt its fiscal year revenue and profitability due to delayed production. Honda is expected to see a 2013 rebound in revenues of 30%. Honda does have has the largest exposure to the North American market and will benefit more from the rebounding U.S. industry sales. Honda will also benefit from a focus on smaller, more fuel-efficient vehicles.
Toyota is the world’s largest vehicle manufacturer based on sales and production volume. Strong outperformance in the most recent quarter was driven by cost reductions, but the Japanese automaker reduced outlook for sales growth due to political issues with China. This, the territorial dispute that has already led to the boycott of Japanese goods by the Chinese people, will be a headwind for both Honda and Toyota.
As of the end of June, GM represented Taconic’s fourth largest 2Q 13F holding. Taconic owned over 9 million shares—making up over 7% of their 13F. GM also had other big name funds as investors at the end of 2Q, including Warren Buffett, David Einhorn and John Griffin. Check out all the funds owning GM.
From a valuation standpoint, GM and Ford trade well below the other three car companies on a P/E basis, at 9x and 3x, respectively. Although GM and Ford are also the cheapest on a P/S basis, trading at 0.3x each, GM’s expected annual five-year EPS growth rate is well above that of Ford’s, with GM expected to grow at an 11% CAGR, and Ford at only 5%. We see GM as having a leg up on its biggest competitor and also being able to better compete overseas with a strengthening balance sheet. Check out our other thoughts on just how much GM may be unloved and misunderstood.
Brosens noted that GM is trading like the ‘old GM,’ at only 5x EBITDA, but the car company has increased sales over 40% over the last two years. He also discussed that its 5x multiple does not take into account the pro forma impact of the treasury sales. Brosens suggests the carmaker could see its stock up 200% on the back of strong fundamentals and strategic CapEx over the next couple years.