GM’s Path to Shareholder Freedomby
The Standard & Poor’s 500-stock index and Dow Jones industrial average keep setting all-time highs. Meanwhile, General Motors hasn’t enjoyed such a brisk auto-sales market since before the financial crisis, buttressing manufacturing employment and a general sense of Rust Belt renewal.
Curious, then, that A doesn’t much reflect B: Once the largest component in the market, GM was escorted out of both the S&P 500 and the Dow four years ago after taking a government rescue to enter bankruptcy, where it jettisoned much of its debt. (While the Dow hogs headlines, the S&P 500 is the more institutionally significant bogey, with nearly $6 trillion in worldwide fund assets benchmarked against it.) The stock, though trading a few dollars shy of its 2010 IPO price of $33, is up 60 percent from its 52-week low. But with the U.S. and Canadian governments and the United Auto Workers owning more than 40 percent of the company, according to data compiled by Bloomberg, there’s only so much of it to go around for index funds and pensions. GM can clear that bottleneck by buying back its shares. Indeed, the U.S. Department of the Treasury in January said it intended to divest its GM stake completely in 12 to 15 months.
“We do not comment on possible changes to the S&P 500 membership,” says Howard Silverblatt, senior analyst at S&P Dow Jones Indices.
But GM, with a $40 billion market value, is positioning itself to rejoin that League of 500—once it wrests its shareholding autonomy back from the government. This idea by way of none other than Jim Grant of the indispensable Grant’s Interest Rate Observer. Although an outspoken critic of Washington’s bailouts, Grant now thinks GM is a compelling investment. The shares are flat year-to-date, compared with a broader market up in the double digits.
In his April 5 report, Grant seized upon GM having just reported its best March in five years, with a fleet of big pickup trucks to be revealed later in the year. In terms of financial momentum, he notes that it’s reasonable to expect the automaker to deliver free cash flow of $5 billion this year, compared with $3 billion in 2010. For context’s sake, $5 billion represents an almost 11 percent free cash flow yield to GM’s market value—“nothing to scorn these ZIRPy days,” Grant writes.
According to Autodata, GM sold 9.3 percent more cars and light trucks in the first three months of 2013, better than its sector’s gain of 6.4 percent. All four of GM’s brands added sales in the first quarter.
And management is feeling its growth oats. It’s planning to invest $1.5 billion in North America this year—one that will see GM introduce about 20 new vehicles—after its market share fell to an 88-year low in 2012. (Its share did increase in the first quarter). GM has announced more than $10.2 billion in investments in plants, fuel-efficient vehicles, and other capital improvements since July 2009. At a press conference this week, GM, the world’s second-largest carmaker, said it plans to invest €4 billion ($5.2 billion) in its European operations through 2016, despite those operations having racked up $18 billion in losses since 1999. Europe’s car market is in the throes of six years of shrink. These realities make it especially notable that GM isn’t just content to husband its cash and remain a ward of the state.
“As long as the government has a big stake in GM, don’t expect it to go in the S&P 500,” says Paul Hickey of Bespoke Investment Group, who believes Ford Motor is currently sufficient representation for the benchmark.
For his part, Grant notes that with $26 billion in cash and equivalents, and another $11 billion or so in credit facilities, GM could do a lot worse than to invest in buying back its full private-sector freedom. The government—which has so far recouped $30.5 billion of its $49.5 billion bailout—will gladly abet that jailbreak.