General Motors (GM) shares were jumping in a down market Friday morning on the back of positive guidance for 2019 earnings delivered by CEO Mary Barra at the company's Capital Markets Day in New York. Given the recent profit warnings from Apple (AAPL) , Macy's (M) and American Airlines (AAL) , GM's news was refreshing. Today's ray of light does not change the fact, however, that even after this morning's move GM shares have fallen 15% in the past 12 months.
GM needs to benchmark itself against other consumer goods companies in terms of shareholder returns, not just other car companies. 99.9% of the investing population does not care that GM shares have outperformed those of Ford (F) . Other than management compensation consultants, only the lonely, wandering geeks known as sell-side auto auto analysts -- and I was one for 11 years -- use the metric of car company vs. car company when it comes to shareholder returns. The rest of the world looks at any company versus the overall market.
As of Thursday's close (obviously the stagger has narrowed a bit this morning) GM shares' 3-year and 5-year annualized average returns of 9.99% and 0.9% lagged the Morningstar U.S. stock market total return index by 285 and 805 basis points, respectively.
GM needs to focus on its shareholders, not its competitors. It can be difficult to do that in a political climate in which GM's decision to close its final assembly plant in Lordstown, Ohio (among others) brought the company much criticism in November, but the Street rewards managements that make the tough decisions, not the easy ones.
So, for GM to re-attain the mid-$40s share price that the market accorded it as recently as last June, I believe the company needs to perform the following actions:
Deliver sustainable operating margins above 10% in the GM North America unit. We're barely into 2019, but today's release was an indication that GM believes that hurdle is attainable again this year. Great outlook, but let's see them deliver.
Buy back stock. I was re-reading GM's 3Q2018 10-Q this morning and came across a shocking stat. GM's share repurchases for the first 9 months of 2018 totaled a paltry $100 million, a huge decline from the $3 billion figure for the corresponding nine month period in 2017. With automotive cash flow running at an annual rate in excess of $13 billion, capital expenditures slated for 2019 at a normal level of $8 to $9 billion and GM Financial paying a $400 million dividend back to the parent company in the fourth quarter of 2018 -- the first intra-company dividend in GM Financial's relatively short, post-Crisis history -- GM is flush with liquidity. Shareholders need to know what GM management is planning to do with that excess cash flow.
Delineate the future for a spun-off GM Cruise. If GM is not buying back shares because management believes every incremental dollar of capital should be spent on the transition toward a mobility company -- especially through GM's autonomous vehicle division, Cruise --then the Street needs to know when those investments will be returned. Based on today's early trading price of $37.41 and the midpoint of its 2019 EPS guidance range of $6.50-$7.00, GM shares are trading at 5.5x 2019 EPS.
Instead of subtracting the $14.8 billion in outside investments in Cruise that GM has raised from SoftBank (SFTBY) and Honda (HMC) , and saying "our core automotive business in really cheap," GM management needs to present the market with an alternative to owning that core automotive business, with its unfunded pension and OPEB liabilities.
I have no idea what multiple the market would accord to Cruise, but I am quite certain it would be magnitudes higher than 5.5x. Tesla (TSLA) is trading at about 150x 2019 consensus EPS today. Yet there is not a single person that I have spoken to at any global auto company that believes that Tesla is anywhere near a viable AV offering, unlike Cruise, Alphabet's (GOOGL) Waymo and UBER. I believe all three of those entities will have commercially-viable AVs on the road by the end of 2019.
So, it's a good day to be Mary Barra, but it has been a bad year -- and 5 years, as well -- in which to be a GM shareholder. If Ms. Barra wants to watch shareholder value languish and lament the cyclicality of her industry, then GM shares will remain in my "avoid pile" permanently, albeit slightly closer to the top than Ford. Companies that only manufacture autos are NEVER going to be accorded higher multiples than they are currently, which is not materially different than the ones accorded them when I first started following the industry in 1992. Only a real transition to higher value-added services (self-driving cars, for instance) can alter that dynamic.
Spending nearly all my adult life following auto stocks has taught me to avoid them in all but the worst global economic times, and obviously we are light years from those. If you are willing to bet on a future of human transportation dominated by AVs, though, GM shares offer a cheap way to play that dynamic without all the hype and mumbo jumbo afforded to "geniuses" like Elon Musk. If Ms. Barra is willing to be as bold with the company's balance sheet as with its corporate strategy, GM shares could be the ultimate value play.
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