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Value Investor Drives Ahead with GM

02/15/2018 5:00 am EST

Focus: INDUSTRIALS

John Buckingham

Editor, The Prudent Speculator

General Motors (GM) recorded another earnings record in 2017, following records in 2016 and 2015, and sold 8.9 million autos globally, notes John Buckingham, value-focused money manager and editor of The Prudent Speculator.

The automaker reported another solid quarter with its Q4 2017 financial release. The giant auto maker posted adjusted EPS of $1.65, versus consensus estimates of $1.38. Revenue for the period was $37.72 billion, versus projections of $37.11 billion.

That said, GM recently announced that it expects 2018 to be largely in line with 2017 as auto sales have likely hit a plateau. CEO Mary Barra said, “The actions we took to further strengthen our core business and advance our vision for personal mobility made 2017 a transformative year. We will continue executing our plan and reshaping our company to position it for long-term success.”

CFO Chuck Stevens added, “Improvements in all operating segments and an intense focus on cost reductions generated a record quarter and another record year. We plan to build on this momentum in 2018 and beyond as we focus on growth opportunities across many parts of our business.”

Toward those ends, GM continues to focus resources on its most profitable franchises, it sold its Opel/ Vauxhall and GM Financial European operations, and it exited South and East Africa, and India.

The company reduced U.S. inventories to align supply with demand, while preparing for its all-new full-size pickups, and completed the refresh of its crossover portfolio by launching the Chevrolet Traverse and Equinox, Buick Enclave and GMC Terrain.


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GM also laid out plans to introduce at least 20 new all-electric vehicles that will launch by 2023. The company also recently filed a Safety Petition asking the U.S. Department of Transportation to allow GM to safely deploy its fourth-gen self-driving Cruise AV on public roads.

This vehicle eliminates the steering wheel, pedals and other unnecessary manual controls. GM expects to deploy self driving vehicles in a ride sharing environment in 2019.

GM returned $6.7 billion to shareholders in 2017 through share buybacks of $4.5 billion and dividends of $2.2 billion. Since 2012, GM has returned more than $25 billion, which represents more than 90 percent of available free cash flow generated over that time.

Happily, GM’s 2017 year-end global automotive pension underfunded position was $14.1 billion, an improvement from $18.2 billion at the end of 2016. The funded status of the company’s $68.5 billion 2017 year-end U.S. defined-benefit pension plan obligation improved to about 92%, up from approximately 90% in 2016, as plan assets grew to $62.6 billion from $61.6 billion.

While Tesla (TSLA) gets most of the investor love for electric vehicles, we think more people need to pay attention to GM. Its Volt continues to do well and it is planning multiple new offerings in the coming years. Needless to say, GM has far fewer production issues than Elon Musk’s company.

We continue to like the company’s solid balance sheet ($21 billion in cash and marketable securities), improving cost controls, healthy free cash flow and generous capital return initiatives. The stock now trades for 6.6 times NTM earnings projections and yields 3.7%. Our target price for GM shares is currently parked at $58.

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