Value investors have been paying a great deal of attention to American automotive giant General Motors (NYSE: GM) lately because of Warren Buffett’s interest in the company.
Berkshire Hathaway (NYSE: BRK.A) increased its stake in GM by 40 million shares at the end of the third quarter of 2015. That means Buffett’s organization now owns around $1.7 billion (€1.5 billion) worth of General Motors. Is Buffett right about this automaker? Is it really a value investment with high growth potential?
Not if we examine revenues. General Motors’ revenue actually fell by $3.57 billion (€3.15 billion) during 2015. Its biggest American rival, Ford Motor (NYSE: F), saw its revenues increase by $5.48 billion (€4.84 billion) during the year. To make matters worse, GM’s revenues fell during a year when the U.S. auto industry was enjoying record sales.
American vehicle sales increased by 5.7% in 2015, reaching a volume of 17.5 million and a value of $570 billion (€503.33 billion), The Wall Street Journal reported. These were the best auto sales in 15 years, which is what Buffett seems to be betting on with his increased GM stake.
Is Ford about to Overtake GM?
Yet General Motors’ revenues fell during the course of the year, which seems to indicate it was losing market share. General Motors started 2015 with a TTM revenue of $155.93 billion (€137.67 billion) that fell to $152.36 billion (€134.54 billion) a year later. In fact, GM lost revenue for three of the four quarters of 2015; revenues fell to $154.23 billion (€136.19 billion) in the first quarter, $152.76 billion (€134.89 billion) in the second quarter, and $152.35 billion (€134.53 billion) in the third quarter, but climbed slightly to $152.36 billion (€134.54 billion) at year’s end.
Ford, General Motors’ closest U.S. benchmark, started 2015 with $144.08 billion (€127.023 billion) in revenue. It dropped to $142.1 billion (€125.48 billion) in March and fell again to $141.95 billion (€125.31 billion) in June, then rose to $145.18 billion (€128.2 billion) in September and $149.56 billion (€132.07 billion) in December. If these figures are correct, Ford’s revenue increased by $4.38 billion (€3.87 billion) during the fourth quarter of 2015.
On the other hand, GM’s revenue only increased by around $100 million (€88.3 million) during the same period. This seems to indicate that General Motors may have actually lost significant market share to Ford during that period.
Ford’s revenue is also approaching that of GM, meaning that Ford could soon overtake its historic rival as the largest U.S. based automaker. All the other major vehicle manufacturers that operate in the United States, including Fiat Chrysler Automobiles (NYSE: FCAU), are foreign owned.
It looks as if Buffett should have bought Ford rather than General Motors. Ford’s revenue is growing at a much faster rate and it is much cheaper: Ford was trading at $13.28 (€11.73) a share on March 30, 2016, while GM was trading at $31.05 (€27.42) a share.
General Motors’ Astounding Profit Margin
So what attracted Buffett to GM when Ford seems to be so much cheaper? The answer appears to be found in the profit margin.
General Motors had a profit margin of 15.81% during the fourth quarter of 2015. That profit margin did shoot up significantly, rising from 3.5% on Sept. 30, 2015 to 15.81% on Dec. 31, 2015. That makes for a 12.31% increase in profit. Ford ended 2015 with a profit margin of 6.6%, a 1.6% increase over September 2015.
The profit margin seems to be attracting Buffett to General Motors. He seems to be betting that GM will soon experience a massive increase in cash flow from the increased profit margin. Naturally, skeptical value investors will want to know if that increased profit margin is actually adding cash flow.
Is Automakers Income Rise Permanent?
The answer, when one looks at income, is yes. General Motors reported a net income of $9.687 billion (€8.55 billion) in December 2015, a $5.738 billion (€5.07 billion) increase over December 2014; when the company reported an income of $3.949 billion (€3.49 billion), GM added nearly six billion in income in just one year.
Interestingly enough, Ford’s income increased at a very similar rate. It reported $1.231 billion (€1.231 billion) in income in December 2014 and $7.373 billion (€6.51 billion) in December 2015. That means Ford actually added more income than GM in 2015, $6.139 billion (€5.42 billion) over the course of the year.
The question we need to ask ourselves though is if this income increase is permanent History shows that automakers income can suddenly shoot up and down with the rate of car sales. As recently as June 2012, Ford reported $17.7 billion (€15.63 billion) in income. General Motors reported $9.926 billion (€8.77 billion) in income back in June 2011.
The nature of American car ownership indicates that the sudden upswing in auto sales might not be a permanent phenomenon. The average American now keeps a new vehicle for 6.5 years, according to IHS Automotive, which means GM will not see many of its customers from 2015 again for 6.5 years.
To make matters worse, the average age of a car or truck on the American road is 11.5 years old, which means many of the vehicles were purchased before the economic meltdown of 2007-2008. Therefore, much of the new car buying is being done by people replacing worn out vehicles.
Is General Motors Making Money?
The final question we need to ask is if the added revenue and income at General Motors is generating additional cash. The answer to that question appears to be yes.
General Motors reported making $13.69 billion (€12.09 billion) in cash from financing, mostly from car loans and leases, in the fourth quarter of 2015, an increase of $8.015 billion (€7.08 billion) over the same period in 2014 when GM made $5.675 billion (€5.01 billion) in cash from financing.
This seems to indicate that General Motors has a great deal of float because it is collecting most of that money from monthly car payments. More importantly, statistics show us that car buyers will keep making those payments for six years.
GM also reported making $11.98 billion (€10.58 billion) in cash from operations in December 2015, an increase of $1.92 billion (€1.7 billion) over the same month in 2014 when the figure was $10.06 billion (€8.88 billion). General Motors also reported $23.4 billion (€20.06 billion) in cash and short-term investments in the fourth quarter of 2015, down from $28.18 billion (€24.88 billion) just a year earlier.
From these figures, we can conclude that General Motors is a value investment because it has a lot of cash, but it’s a risky one because there’s no guarantee the increases in profit or cash from financing are permanent. For those like Buffett, who like to take risks on buy and hold value investments, General Motors is well worth a look.
