Key Brands General Motors Umbrella

All
You Need to Know about Auto Industry Leader General

Motors
By John Parker
Mar 15, 2016. 05:37 PM
General Motors: The Beginning of the US Auto Giant
The beginning of General Motors
General Motors (GM) is the largest American automaker. The company was founded in 1908 by
William C . Durant. This was also the year when major US automaker Ford Motor C ompany (F)
launched its iconic Model T.
Despite Ford’s dominance, it didn’t take too much time for General Motors to prove its strength in
the automotive market.
The great corporation of brands
Since the beginning, General Motors has been a corporation of multiple brands in the automotive
industry. From luxury car brands such as C adillac to heavy-duty, full-size truck brand Jiefang,
General Motors has them all under one umbrella. GM’s aggressive acquisitions of such powerful
brands have made it one of the most reputed companies in the auto industry.
By the early 1920s, US auto demand witnessed a shift from basic vehicles to luxury, or
performance, vehicles. During this period, General Motors launched many better-looking new
vehicles that were also more powerful than Ford’s Model T. This helped GM to expand its customer
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base and expand its US market share to 12%.
In the late 1930s and early 1940s, the company also supplied trucks and weapons to the US
military during World War II. This was followed by a substantial increase in GM’s US market share
to 54% by 1954.
Among other major automakers (VC R), Fiat and Ford Motor C ompany were founded before
General Motors, in the years 1899 and 1903, respectively. European auto giant Volkswagen
(VLKAY) was founded much later than General Motors, in 1937. In 2014, Fiat merged with US
automaker C hrysler to form a new business entity known as Fiat C hrysler Automobiles (FC AU).
Series overview
In this series, we’ll look at a brief history, key geographical regions, and key brands of General
Motors. Then we’ll analyze the company’s most recent financial figures and data, which are
important to know for investors. This series will help investors to know the key aspects of General
Motors’ business before investing in its stock.
Toward the end of the series, we’ll find out how the company’s current valuation looks, and what
factors could drive its valuation multiples in the future.
C ontinue to the next article to read about General Motors’ most powerful brand in its successful
history.
How Chevrolet Was Vital for General Motors' Success
Inseparable association
P reviously, we looked at a brief history of General Motors (GM) and how the association of
multiple automotive brands helped the company to emerge as the largest US automaker. Now
let’s take a look at GM’s key brand, C hevrolet, and its contribution to the company’s success.
Chevrolet brand history
In 1911, three years after founding General Motors, William C . Durant created the C hevrolet
brand with road racer Louis C hevrolet. Back then, Louis C hevrolet was a popular road racer. For
this reason, Durant chose his last name, as he believed that C hevrolet’s reputation as a road
racer would help him to sell more cars.
In 1919, under the leadership of Alfred Sloan, the C hevrolet brand emerged as the leading
competitor to the most popular automaker, Ford Motor C ompany (F). C hevrolet’s popularity was
primarily based on the performance, durability, and value that its cars offered.
The first C hevrolet car model was the Series C C lassic Six. It was equipped with a 40 horsepower
engine more powerful than the 20 horsepower engine of Ford’s Model T. This was just the
beginning of the success story of the C hevrolet brand under General Motors.
Importance of Chevrolet brand
By the year 1929, C hevrolet became the best-selling auto brand in the United States. Since then,
C hevrolet has become the largest contributor to General Motors’ revenues.
In 1955, C hevrolet’s small-block V-8 engine was introduced. It would be used by General Motors in
many car and truck models in the coming five decades. Even today, a new generation of the
same engine is used in various trucks and sport utility vehicles manufactured by the company.
Some of GM’s performance cars, including the C amaro SS and the C orvette, are also equipped
with the same new generation of small-block V-8 engine. Therefore, the significance of the
C hevrolet brand is immense for General Motors.
Major Japanese automakers (XLY) such as Toyota Motor (TM) and Honda Motor C ompany (HMC )
were also founded much later than GM and Ford, in the years 1937 and 1946, respectively.
C ontinue to the next article to know about some of the other key brands that General Motors
currently offers.
Key Brands Under General Motors' Umbrella
General Motors’ key brands
P reviously, we discussed how C hevrolet brand has played an instrumental role in the success of
General Motors. In this article of the series, we’ll have a look at some other key brands under
General Motors’ (GM) umbrella.
Cadillac brand
C adillac is the most popular luxury car brand in General Motors’ portfolio. This brand was
established in 1902 with the foundation of the C adillac Automobile C ompany. C adillac became a
part of GM’s portfolio in 1909.
C adillac brand cars are known to have been used by US presidents for decades. C urrently, the
brand is also playing an important role in expanding GM’s reach in the C hinese market, with high
demand from the region. At present under the C adillac brand, the company offers the 2016 C T6
Sedan, the 2016 ATS-V C oupe, the 2016 Escalade, and the 2016 SRX C rossover, among other
vehicles.
Buick brand
Buick is the entry level luxury brand in General Motors’ portfolio. The brand was established in
1899 when David Dunbar Buick founded the Buick Auto-Vim and P ower C ompany.
Since the beginning of General Motors in 1908, Buick has been a significant part of its portfolio.
Under this brand, the company sells many modern luxury sedans and crossovers cars. C urrently,
the Buick Enclave, Buick Verano, Buick Regal, and Buick C ascada are some of the key Buick car
models offered by GM.
Volkswagen’s (VLKAY) P orsche and Daimler’s (DDAIF) Mercedes can be seen as the competition
to General Motors’ vehicles in the luxury car segment.
GMC brand
GMC has manufactured trucks since 1902. It later became an integral part of General Motors’
portfolio. During World War II, GMC produced nearly 600,000 trucks to be used by the US military.
Even today, the brand is well known in the US market in the full-size truck segment.
However, for more than three decades, the pickup truck segment in the US auto market (VC R)
has been dominated by Ford’s (F) legacy F-series pickup trucks.
Apart from full-size trucks, General Motors also produces sports utility vehicles under the GMC
brand. C urrently, the C anyon, Sierra 1500, Denali line, and Savana are some of the key vehicle
models that are available under this brand.
C ontinue to the next article to learn about the key geographical markets for General Motors.
Key Geographical Markets for General Motors
Key geographical markets
P reviously, we looked at the history of General Motors’ (GM) key brand C hevrolet. C urrently, GM
has assembly, manufacturing, distribution, office, or warehousing operations in 59 countries. Now,
let’s take a look at some of the key geographical markets that contribute to the company’s
revenues.
GM North America
Since GM’s beginning, North America has been its most important market. North America alone
accounted for ~70% of GM’s total revenues in 2015. In recent years, GM’s revenues from North
America have also risen. This was primarily due to a recent trend in the US auto market in which
demand for pickup trucks surged over small car demand. Low gasoline prices and lower interest
rates could also be key drivers behind this shift in the US auto demand pattern.
In North America, GM delivers vehicles under multiple brand names. Some of these key brands
are Buick, C adillac, C hevrolet, and GMC .
Outside of North America, General Motors delivers vehicles under brands such as Holden, Opel,
and Vauxhall along with Buick, C adillac, C hevrolet, and GMC .
GM Europe
Traditionally, Europe has also been a key market for General Motors. Note that General Motors
Europe (or GME), as reported in its financial statements, also includes Russia. This region
accounted for nearly ~12.3% of the company’s total revenues in 2015. In recent years, the
European economy has witnessed a slowdown that has also impacted GM’s performance in the
region.
In 2015, General Motors ceased manufacturing vehicles, eliminated Opel’s distribution, and
minimized C hevrolet’s distribution in Russia. GM took these steps mostly due to high competition
in the region along with the high capital investment required to localize the manufacturing of its
vehicles. The company believed that its business model in Russia would not have been sustainable
over the long term.
Other major automakers (XLY) that have significant presences in the European auto market are
Volkswagen (VLKAY), Daimler (DDAIF), and Ford Motor C ompany (F).
Other than these two key markets, General Motors also has been working to address rising
demand from emerging markets, especially from C hina. We’ll discuss this in our next article.
General Motors Continues to Rule the Chinese Auto Market
Chinese auto market
Today, C hina is the largest auto market in the world. In 2015, C hina’s vehicle sales reached at 25.1
million units, up 4.3% from the previous year. This was much higher than US auto sales figures of
17.4 million vehicles during the same year.
In this article, we’ll find out why the C hinese auto market is so important for General Motors and
what challenges it may face in the region going forward.
General Motors in China
In 2015, General Motors remained at the top in the C hinese market, with the largest market
share of 14.9%. This was higher than its share of 14.7% in 2014.
Note that this market share data also includes General Motors’ joint ventures in C hina. In these
joint ventures, the company shares ownership and management of a company with one or more
parties. This means that its revenues from the region are shared with the other companies
involved in these joint ventures.
In recent years, General Motors has been trying to capture more C hinese vehicle demand by
launching market-specific popular vehicles such as various sports utility vehicles, C adillac vehicles,
and multipurpose vehicles.
Competition in China
As you can see in the chart above, the company (including joint ventures) sold ~3.6 million
vehicles in C hina in 2015. This can be seen as one of the key strengths of General Motors.
In recent years, major global auto industry players (VC R) including GM, Volkswagen (VLKAY),
Toyota Motor (TM), and Ford Motor C ompany (F) have faced intense competition from local
C hinese automakers. Auto manufacturers in countries such as C hina and India benefit from the
lower cost of operations, including labor. This leads to intensified competition in such emerging
markets.
C hinese automakers include C hang’an Automobile Group, BAIC Motor, and Dongfeng Motor.
Other challenges
According to General Motors, the intensifying competition in the C hinese market may lead to the
further price reductions and lower margins in the coming years. Note that the company’s margins
are already much lower in the C hinese market compared to the North American market.
Going forward, the company may also face challenges, as the growth rate of C hinese auto
demand has fallen lately amid concerns of economic slowdown in the region.
General Motors also helps its customers to purchase vehicles through its financial services arm.
We’ll take a look at this in the next article of the series.
How GM Helps Customers Buy Vehicles through GM Financial
GM Financial Company
P reviously, we looked at how North America, Europe, and C hina are key markets for General
Motors (GM). In this article, we’ll explore how General Motors Financial C ompany, the financing
arm of GM, is helpful in generating more sales volume.
Importance of GM Financial
General Motors has all types of vehicles ranging from small cars to large trucks. The majority of its
portfolio is targeted to the masses. To encourage people to purchase its vehicles, the company
provides automotive financing services through General Motors Financial C ompany.
GM Financial offers retail lending, both loan and lease, to its customers. Additionally, the company
provides new and used vehicle inventory financing, inventory insurance, working capital, capital
improvement loans, and storage center financing services to its dealers. This facility is known as
commercial lending.
The financing arm of the company provides its services primarily in North America, Europe, C hina,
and South America. At the end of 2015, GM Financial had 50 facilities globally. Of these 50
facilities, 22 are located in the United States.
Other major facilities outside the United States include those in Brazil, C anada, C hina, Germany,
Mexico, and the United Kingdom.
Functioning and funding
To avoid currency fluctuation–related risks in international markets, General Motors Financial funds
its operations primarily from local sources. These sources include asset-backed securities markets
and other secured and unsecured debt markets. In 2015, revenues from GM Financial stood at
$6.4 billion, 4.2% of General Motors’ total revenues.
The company expects its revenues from this financing arm to expand in the coming years and to
drive incremental sales of its vehicles. GM Financial plays an important role in boosting GM’s sales
volume by ensuring easy availability of financing options to its customers and dealers.
Among other major automakers (FXD), Ford Motor C ompany (F), Toyota Motor (TM), and
Volkswagen (VLKAY) also provide financing facilities to their customers and have their own
financial services arms.
C ontinue to the next article to learn about how General Motors is doing in terms of global market
shares with the help of recent data.
Why Is General Motors’ Global Market Share Falling?
Importance of market share
P reviously, we looked at how General Motors uses its financial services arm to boost sales in its
key markets.
Now, let’s look at the global market share of the company against its competition. This
comparison reflects the ability of a company to maintain its position in the global auto market.
We’ll also analyze how it may impact GM’s business going forward.
General Motors’ global market share
In 2015, General Motors managed to remain at the top in the US auto market, with the largest
market share of 16.8%. With this market share, the company is securely ahead of its closest
competition, Ford Motor C ompany (F), in North America. Ford reported a market share of 14.2%
for the same period.
However, in recent years, General Motors’ global market share has been falling, as you can see in
the chart above. In 2015, the company’s global market share stood at 11.2% against 11.5% two
years ago.
This fall was registered primarily due the recent change in the company’s business model in
Russia, lower sales in Brazil, and pre-planned reduction in fleet sales in the United States.
In 2013, GM also announced that it would withdraw its C hevrolet brand from the European
market, deciding to focus only on popular brands in the region such as Opel and Vauxhall. In the
last two years, this has taken a toll on its global market share.
C urrently, auto industry (XLY) giants such as Toyota Motor (TM) and Volkswagen (VLKAY) are
ahead of GM in terms of global market share.
Impact on GM’s business
If we analyze General Motors’ falling global market share closely, we’ll see that the company has
taken steps to increase its profitability at the cost of market share. Its cutting US fleet sales and
withdrawing the C hevrolet brand from Europe, as mentioned above, are good examples of such
steps.
Wall Street hasn’t cared much about the company’s falling market share in recent years.
A positive trend has been seen in the company’s stock. We can likely expect this positive trend to
continue as long as GM continues to take steps to increase its profitability that affect its market
share.
In the next article, we’ll take a look at General Motors’ margins to better understand its
profitability.
How Do General Motors' Margins Look?
Importance of margins
P reviously, we discussed how General Motors (GM) has taken some steps that have negatively
affected its global market share. However, these steps have been taken to expand its margins. In
this article, we’ll take a closer look at GM’s margins.
In general, margins are one of the most important parameters used to analyze an automotive
company (XLY). Significant and sustainable expansion in an automaker’s profit margins indicates
sound growth in terms of its profitability.
Therefore, investors must pay attention to the margins of various auto companies to better
understand the profitability of their businesses.
General Motors’ margins and the competition
In 2015, General Motors reported a gross margin of 15.8%. This was higher than its closest
competitor Ford Motor C ompany (F), which posted a gross margin of 15.4% for the same period.
This higher margin is likely the result of consistent efforts made by General Motors’ management
to protect its margins, even at the cost of losing market share. As we noted in our previous article,
these efforts have included cutting fleet sales in the United States and withdrawing the C hevrolet
brand from Europe.
Japanese automaker Toyota Motor (TM) has an industry-leading margin of 19%, much higher than
GM’s. This is primarily due to a difference in product mix. Toyota has a strong presence in the
premium vehicle segment, which yields higher margins than mass-marketed vehicles.
EBITDA margin
In 2015, General Motors’ EBITDA (earnings before interest, tax, depreciation, and amortization)
margin stood at 8.5%. This was higher than Ford’s 7.5%. In contrast, Toyota and Volkswagen
(VLKAY) had higher EBITDA margins of 15.3% and 14.6%, respectively, during the same period.
Note that in the last couple of years, Toyota and Volkswagen both benefited from weakening local
currencies, that is, the Japanese yen and the euro, respectively. We’ll talk about the factors that
affect General Motors’ margins in the next article.
What Factors Are Affecting General Motors' Profitability?
General Motors’ net profit margin
In the last article of this series, we looked at General Motors’ (GM) gross and EBITDA (earnings
before interest, tax, depreciation, and amortization) margins against those of its competitors.
Now, let’s take a look at its net profit margins and analyze some factors that are affecting its
profitability.
At 6.4% in 2015, GM’s profit margin stood higher than US auto giant Ford Motor C ompany’s (F)
4.9% profit margin.
Unfavorable currency movement
According to 2015 sales volume, General Motors is the largest US automaker and the third-largest
automaker globally. Having business operations in several markets globally exposes the company
to currency fluctuation risks.
At constant currency rates, GM’s 2015 revenues were $5.8 billion higher year-over-year. This
implies that the stronger US dollar stole nearly $9.3 billion from General Motors’ 2015 revenues.
C urrency fluctuation also affects General Motors’ profitability.
In recent years, the profitability of other US automaker Ford was also negatively impacted by a
stronger US dollar. However, Japanese automakers (FXD), including Toyota Motor (TM) and Honda
Motor C ompany (HMC ), gained from the continued weakness of the Japanese yen versus the US
dollar.
Cutting fleet sales in the United States
Fleet sales, or wholesale sales, are made at a discount to a vehicle’s normally-quoted prices.
These sales help companies add to their revenues without contributing proportionately to profits.
In the past couple of years, General Motors has cut down on its fleet sales to protect its profit
margins.
Note that in 2015, US auto sales were at historic high levels, with 17.4 million vehicles sold. Due to
this, US automakers such as GM have been running their plants at full capacity. In this scenario,
cutting down fleet sales should help to improve the company’s margins. This is because General
Motors can utilize its plant capacity to build bigger vehicles that are more profitable for its retail
customers.
Automotive fleet sales include the wholesale supply of vehicles to various taxi companies, car
rental companies, and public departments. Typically, margins from fleet sales remain lower than
retail sales of vehicles. According to GM, it plans to continue cutting its fleet sales in the coming
years in efforts to expand its margins further.
C ontinue to the next article to find how General Motors is planning to benefit from a recent trend
in the US auto market.
Why General Motors Is Trailing in the Race with Ford’s F-150
US auto demand
US auto sales data suggest that the demand for utility vehicles and trucks grew positively last
year. Meanwhile, the demand for small cars in the United States was marginally down in 2015
from a year earlier.
In this article, we’ll talk about this recent trend in US auto demand, which is helping US
automakers such as General Motors (GM) to expand their profitability. We’ll also take a look at
how General Motors’ C hevrolet Silverado has been trailing behind Ford Motor C ompany’s (F) F-
150 in the race to benefit from this recent trend.
Supporting factors
C heaper gasoline encourages more retail consumers to purchase utility vehicles instead of small
cars. This is because utility vehicles are generally less fuel-efficient than small cars. Also, the
majority of demand for pickup trucks comes from the housing construction industry. US new
house sales are still improving and are near the highs of 2008–2009, with no major signs of near-
term weakness seen yet.
General Motors versus the Ford F-150
To meet the higher demand for pickup trucks, the race between the top two automakers, General
Motors and Ford, is still on. General Motors’ C hevrolet Silverado is a pickup truck that faces direct
competition from Ford’s F-150 in the US market. As you can see in the chart above, C hevrolet
Silverado sales are still far behind those of Ford’s F-series truck.
Ford’s F-150 line of trucks has been the best-selling vehicle in the United States for more than
three decades now. In recent years, Ford has begun producing a new aluminum body version of
the F-150. The aluminum body results in better fuel efficiency and faster acceleration.
A lack of such innovation in the C hevrolet Silverado by General Motors has been disappointing.
Timely action from General Motors might have helped the company to increase the sales of its
C hevrolet Silverado pickup truck, closing the gap between it and the F-150.
The key drivers of this recent trend in US auto demand, low gasoline prices and low interest rates,
may not remain intact forever. For now, General Motors still has an opportunity in hand. It will be
interesting to see how the company takes steps to benefit from it.
Other major automakers (VC R) such as Toyota Motor (TM) and Fiat C hrysler Automobiles (FC AU)
also have strong presences in the US pickup truck segment. However, they are far behind GM
and Ford.
C ontinue to the next article to read about General Motors’ current pension obligations and its bad
phase through bankruptcy court.
General Motors' Pension Obligations and Bad Phase of Bankruptcy
General Motors’ pension plan
General Motors (GM), the largest US automaker, was the first company to be unionized in the
auto industry. Since the beginning of 21st century, the company has been struggling to meet its
massive pension obligations.
In this article, we’ll take a look at GM’s current global and US pension obligation statuses. We’ll also
talk about the company’s 2009 bankruptcy filing.
Current pension obligations
At the end of 2015, General Motors’ astounding global pension obligations stood at $95 billion. This
was a fall of $9 billion compared to the previous year. However, it was still underfunded by $21
billion, or 21% of the company’s total global pension obligations.
Likewise, at the end of 2015, GM’s US pension obligations stood at $71 billion, a fall of $5 billion
from the previous year. To add to its struggles, the company’s US pension also remained
underfunded by a massive $10 billion, or 15% of its total US pension obligations. Note that
“underfunded” means that General Motors’ obligation toward its pension plan was much more
than its total assets. If this issue isn’t resolved in time, the situation could become precarious for
the company.
Going forward in 2016, GM plans to contribute $947 million to its non-US pension plans. According
to the company, by mid-2016, it also plans to make a discretionary contribution of $20 billion to its
US hourly pension plan. GM expects this contribution to be funded by debt.
GM’s trip to bankruptcy court
Burdened by rising debt and massive pension obligations, General Motors took a trip through
bankruptcy court in June 2009. The auto industry crisis during that period also took a toll on
the already debt-burdened company. In bankruptcy court, companies are able to leave their
liabilities behind. Debt and other liabilities are restructured in court.
In July 2009, GM emerged from bankruptcy, with the US government providing liquidity to its
predecessor company. The US government sold the last shares of GM in December 2013.
While in bankruptcy, GM reduced its number of brands and cut its costs through union concessions
and the pruning of its global operations. The restructuring continues as GM strives to add
manufacturing capacity to higher-growth areas and optimize manufacturing in lower-growth
areas.
During the 2008–2009 auto industry (FXD) crisis, nearly all mainstream automakers such as Ford
Motor C ompany (F), Fiat C hrysler Automobiles (FC AU), and Toyota Motor (TM) faced financial
difficulties due to a sharp fall in global vehicle demand.
C ontinue to the next article to read about the current leverage condition of General Motors.
How Does General Motors' Current Leverage Position Look?
Importance of analyzing leverage
P reviously in this series, we looked at General Motors’ (GM) profitability and related factors. It’s
also important for an investor to pay attention to a company’s leverage position.
High debt levels increase the risk profile of a company, since debt is a contractual obligation that a
company must fulfill irrespective of market conditions. In this article, we’ll take a look at General
Motors’ current leverage position.
General Motors’ current leverage position
The auto industry (XLY) is highly capital-intensive in nature. For this reason, auto companies tend
to utilize debt extensively. Therefore, it’s not always bad for a company to have high leverage.
What matters most is a company’s ability to pay back its debt and related interest with ease. At
the end of 2015, 55.3% of General Motors’ capital structure was made up of debt, while 44.7%
was made up of equity.
GM’s debt was significantly lower than that of its direct competitor Ford Motor C ompany (F),
which had a 70.4% contribution of debt to its total capital structure. Note that among all major
automakers, Fiat C hrysler Automobiles (FC AU) has the highest leverage. While higher leverage
can magnify earnings, it can also put a squeeze on margins as interest rates rise.
Net debt-to-EBITDA
A company’s ability to pay back its debt can generally be understood by looking at its interest
coverage ratio and its net debt-to-EBITDA (earnings before interest, tax, depreciation, and
amortization) ratio.
Major automakers including GM, Toyota Motor (TM), and Ford have negative net debt in their
automotive operations. As a result, GM’s net debt-to-EBITDA ratio stood at -0.9x at the end of
2015.
For the same period, GM’s interest coverage ratio stood at 11.05x, higher than Ford’s 9.89x. Note
that interest coverage ratio can be calculated by dividing a company’s EBIT (earnings before
interest and tax) with its interest expenses.
C ontinue to the next article to read about General Motors’ plans to expand its electric vehicle
portfolio.
Where Does General Motors Stand in the Electric Vehicle Segment?
Electric vehicle segment
Today, auto industry dynamics are changing at a very fast pace. To stay ahead of the competition,
automakers (XLY) need to innovate and implement faster than their competitors.
C ompanies such as Tesla (TSLA) and Nissan have already demonstrated the potential of the
electric vehicle (or EV) segment. In this article, we’ll talk about General Motors’ (GM) plans to
expand its electric vehicle portfolio in the coming years.
General Motors’ electric vehicles
In 2015, General Motors introduced the second-generation C hevrolet Volt. Including this, the
company currently has a total of five vehicles with some form of electrification in its US market
portfolio. In the coming years, GM will expand its presence in the electric vehicle segment with car
models such as the C hevrolet Volt and the C adillac ELR.
General Motors plans to launch its all-electric model, the C hevrolet Bolt, in 2017. The car, which
may be priced around $30,000 after federal incentives, is estimated to have a 200-mile range.
The C hevrolet Bolt will be a mass-targeted EV. The production of the vehicle is expected to begin
in late 2016 at the company’s Orion assembly plant.
According to the company, it’s working to develop plug-in hybrid electric vehicle (or P HEV)
technology.
GM’s competition in the EV segment
General Motors is likely to face stiff competition from Tesla Motors’ Model 3, which is scheduled to
be unveiled on March 31, 2016. Tesla expects the delivery of Model 3 to begin in late 2017.
General Motors also plans to begin the delivery of its C hevrolet Bolt around the same time but
before Tesla’s Model 3.
Recently, Ford Motor C ompany (F) also revealed its plans to expand its electric vehicle portfolio
by adding 13 new electric vehicles by 2020. At present, Ford is taking orders for its 2016 Focus
Electric, which has an MSRP (manufacturer’s suggested retail price) of $29,000. This vehicle also
could pose competition to General Motors’ C hevrolet Bolt.
Meanwhile, Japanese auto giants Toyota Motor (TM) and Honda Motor C ompany (HMC ) have also
begun taking an interest in electric vehicle development. Going forward, it will be interesting to see
how General Motors could differentiate its C hevrolet Bolt from the competition.
An Investor’s Guide to General Motors' Valuation
General Motors’ valuation methods
There are many different valuation methods available for valuing automakers such as General
Motors (GM). We believe that investors should use a combination of discounted cash flow and
valuation multiples to value the company.
First, let’s use a relative valuation method based on General Motors’ valuation multiples. Later,
we’ll discuss the DC F (discount cash flow) valuation method.
Relative valuation using multiples
Valuation multiples are widely used in the auto industry (FXD) to compare companies. The EV-to-
EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple
is an important relative valuation multiple. It’s generally used for capital-intensive industries such
as the auto industry.
As of March 14, 2016, General Motors’ forward EV-to-EBITDA multiple is 2.2x for the next 12
months. This is lower than Ford Motor C ompany’s (F) EV-to-EBITDA multiple of 2.8x.
Investors can also use a forward P E (price-to-earnings) multiple in comparing two similar
companies in the auto industry. As of March 14, 2016, General Motors’ forward P E ratio, based on
its earnings forecast for the next 12 months, stands at 5.6x, lower than Ford’s 6.4x.
These forward valuation multiples are calculated based on expected values of the denominator
after a year. As you can see in the chart above, General Motors’ valuation multiples are currently
in a downtrend. This could be because of the concern that US auto sales may have already
peaked last year.
Note that currently, Japanese automaker Toyota Motors’ (TM) valuation multiples are trading
much higher than those of major US automakers, including GM and Ford.
Discounted cash-flow method
General Motors’ business model is mature enough to predict its cash flows. This is what makes the
DC F method appropriate in valuing a company such as General Motors, unlike new auto industry
entrants such as Tesla (TSLA). However, the cyclical nature of the automotive industry could be a
challenge when using the DC F method to value an automotive company.
It’s important for investors to understand that valuation multiples depend on investors’ risk
perceptions as well as growth prospects in the industry. We’ll talk about these factors in the next
and final article of this series.
What Factors Could Affect General Motors' Valuation Multiples?
Factors affecting GM’s valuation multiples
In this final article of the series, we’ll discuss key factors that may affect General Motors’ (GM)
valuation multiples going forward.
GM’s risk profile
Since GM has a mature business model, its valuation multiples should be more sensitive to its risk
profile. In the case of a fairly new company such as Tesla (TSLA), growth can be seen as the major
driver of valuation multiples.
As noted earlier in this series, General Motors currently has the highest market share in the US
auto market (XLY). However, intensifying competition and fears of economic slowdown in key
markets outside of North America have increased the company’s risk profile.
Despite being able to capture the largest market share in the C hinese auto market, the company
is facing difficulty expanding its revenues in the region. Also, low profit margins in Russia have
forced GM to shut down its major operations in the region. This indicates significant risk for the
company’s international operations.
The company has also been intentionally cutting its fleet sales in the US market to free its plant
capacity to manufacture more profitable vehicles for retail sales. So far, this plan has yielded
favorable results. However, it also exposes the company to the risk of losing its fleet sales
customer base. In the long run, this could prove to be risky.
The risk factors mentioned above have increased General Motors’ risk profile significantly. Note
that significant increases in an automaker’s risk profile may lead to a lower valuation multiple. This
could be the reason that GM’s valuation multiples are trading lower than those of its peers.
Concerns about US auto demand
The majority of GM’s revenues (70% in 2015) come from North America. C onsidering the cyclical
nature of the auto industry, the company’s high dependence on the US market alone can also be
seen as a big risk.
Fiat C hrysler Automobiles (FC AU) recently mentioned in its 4Q15 earnings report that it considers
2015–2016 to be the peak year for US auto demand. This has boosted debate about whether US
auto demand is at its peak. General Motors denied this possibility in its latest earnings report,
citing strong fundamental data tracked by the company.
Any signs of weakening auto demand from the United States in the near term may greatly affect
US automakers’ future earnings estimates. This could lead to lower valuation multiples.
Among all other major automakers, Ford Motor C ompany (F) and Toyota Motor (TM) also make
the majority of their revenues from the US auto market.

Key Brands General Motors Umbrella

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