by Tom Taulli | May 16, 2012 1:33 pm
There’s nothing like a little backing from the Oracle of Omaha to get your motor running.
According to a recent SEC filing, Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,BRK.B) disclosed the purchase of 10 million shares of General Motors (NYSE:GM). GM shares jumped about 4% on the news Wednesday, trading above $22 in the mid-afternoon.
A few years ago, General Motors was in bankruptcy and had to get $50 billion in loans from the Department of Treasury — though the company has since reorganized its operations and has had a strong comeback. However, the stock remains far below its $33 IPO price (the company came public once more in 2010), and GM has been hampered with sales problems in Europe and China.
So should you join Buffett and buy General Motors stock? To decide, let’s take a look at the pros and cons:
Healthy Business: In the first quarter, General Motors posted a 4.35% increase in revenues to $37.8 billion, and earnings before interest and taxes came to $2.2 billion, up by $200 million over the past year. Part of the success has been from intensive cost-cutting, though the company also has kept its focus on improving its product quality. The result: Improved market share and better pricing.
Stronger Market Demand: According to General Motors, the U.S. car market is expected to post sales of 14 million to 14.5 million vehicles this year, and that figure is likely to improve in the next few years. If anything, Americans are just catching up from the low levels of car purchases since the financial crisis of 2008. GM also should benefit from its footprint in China. Even with some of the recent weakness in the economy, the company still is finding growth. General Motors has sold more than 2 million vehicles annually in the past two years in China.
Strong Financials: General Motors is sturdy and should even be able to survive another recession, should that happen. The company has been able to lower its break-even points and, considering it has $31.5 billion in cash and marketable securities, can easily reduce its costs if demand falls off.
Competition: General Motors is not the only company that has been focused on improving quality. In fact, pretty much the entire sector has gotten the message that slouching could be fatal. Ford (NYSE:F) and Chrysler have made strides in their product lines, Japanese operators like Toyota (NYSE:TM) and Honda (NYSE:HMC) are recovering from last year’s natural disasters, Volkswagen (PINK:VLKAY) is nipping at GM’s heels and Hyundai and Kia continue to see success as they refine their vehicles. So, another problem could be the return of incentives, which could pressure margins.
Europe: Europe, already a sore spot for Europe, could get worse as Greece appears to be on the verge of implosion and Spain is not far behind. A major disruption in the European Union would likely put further pressure on General Motors’ extensive business.
Labor: General Motors has struck key agreements with the United Auto Workers, such as on health care coverage and plant closings. But the company still has a $24.5 billion shortfall on its pension obligations. What’s more, it will not be easy to cut costs in Europe because of onerous labor laws.
Even factoring in the numerous headwinds, General Motors looks poised for growth. The company has a strong footprint in China and will certainly benefit from the revitalization of the U.S. market. With a lower cost structure, cash flows should continue to be robust.
GM’s valuation also is attractive, with shares trading at just 7 times earnings — something likely not lost on a value hound like Warren Buffett.
In light of all these factors, should you buy General Motors stock? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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