Buy GM with expected return of 50%-55% over 12 months, 120-125% for 24 months. Target price of $39.00/$55.00.
Major Thesis Points:
*Tremendous opportunity on China Growth
*Successfully Moving to Higher Margin Vehicles in North America; Including New Truck Launch
*Restructured Balance Sheet is Strong Along with Manageable Pension Liabilities
*Catalyst in Government Sale
There are many ways to measure the potential for the market. In 2011, China had 18.7 million units sold; 18.3 million in 2010; and 13.7 million in 2009. The per capita level of cars in China at 89 per 1,000 is well below potential levels – the 49th largest is South Korea at 244; the US is at 435. J.D. Power predicts 34.5 million unit sales for China by 2020. IHS predicts 30.6 million unit auto sales in 2020.
If we assume the 30 million car number, and give GM 10% market share or 3 million cars the net income should be around $4.4 billion; that would be $2.2 billion to GM or $1.20 a share. Given that it is a growth business - which could easily double or triple in the next 10 years a 15x multiple is reasonable or $18 just in the China business.
New Vehicle Launch & Improving Margin Focus
GM has changed their focus away from market share into higher margin vehicles. This has helped GM increase North America margins. Specifically, in North America trucks contribute around $9,500 per unit to operating income; cars around $5,300. The 2011split of trucks to cars was 63% to 37%; YTD it is 62% to 38% trucks to cars.
GM has developed a new truck line, the K2XX. GM’s average portfolio refresh rate over the next 3-4 years will be twice that of the last 3-4 years. In 2Q 2013, GM will launch the K2XX platform. The benefit should be felt especially strongly in the 12 to 18-month time period post the launch of the redesigned full-size trucks, the company’s most important/profitable platform.
GM has been at a competitive disadvantage over the last several years given the company’s stale product portfolio among its most profitable platform, full-size trucks. The redesigned full-size trucks, the K2XX platform, could cause production volumes to grow by ~10% in 2013.
Pension and OPEB Obligations
GM recently bought $4 Billion in annuities to remove $10 billion in Pension Liabilities from their obligations. They have an underfunded pension and OPEB obligations of an additional $33 billion. The company is using a 4.15% discount rate on its benefit obligations and a 4.96% on its expenses. A rising interest rate environment should help GM cover this issue. Barclays estimates for every 50 bps increase in interest rates the gap reduces by $2.4 billion.
Currently, GM is trading at 2.4x EV/ trailing EBITDA and 1.8x EV/ forward EBITDA. At 2x EV/ 2013 EBITDA GM would be at 38 or 57% higher. GM is trading at 8.4x P/E (LTM) and 5.9x P/E (2013). At 10x 2013 it would be at 44.70.
At 3x EV/ 2014 EBITDA GM would be at $55, or 121% higher.
There are a few upcoming catalysts:
1. Government sale of its 32% ownership is probable in 2013; the current value of $11.7 billion is very achievable where GM could even buy a portion or all the stake.
2. New K2XX truck line being launched in 2013