BUY: GENERAL MOTORS SCRIPPS STUDENT INVESTMENT FUND Mia Shackelford Callie Walsh Grace Wang January 24, 2017
BUY: GENERAL MOTORS
SCRIPPS STUDENT INVESTMENT FUND Mia Shackelford Callie Walsh Grace Wang January 24, 2017
GENERAL MOTORS
AGENDA
Investment Thesis
GM Overview
Auto Industry: Present and Future
CompeJJve Advantages
Comparable Company Analysis
ValuaJon
Risks
Conclusion
INVESTMENT THESIS
Excellence in Efficiency Brand Leadership Investment in InnovaIon
GM has leapt ahead of its compeJtors by refining industry best pracJces
GM has aggressively pivoted to maintain a strong brand
and product strategy
GM has invested heavily in the future of the automoJve
industry
Ability to adapt to changing automoJve landscape
General Motors Overview
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COMPANY OVERVIEW
Highly diversified automoJve company
GM is one of the world’s largest automakers • GM AutomoIve designs, builds, and sells cars,
trucks, crossovers, and automobile parts • Retail sales through dealers • Direct fleet sales • Accessories
• GM Financial provides automoJve financing services
1
1
1 Represents core operaJng performance (i.e. 0 adjusted for major recall campaigns)
EBIT
2015 Revenue
AWer restructuring post-‐financial crisis and bailout in 2008-‐2009, GM commi[ed to a disciplined capital allocaJon plan requiring: • An investment grade balance sheet (currently BBB) with $20bn cash • Investment in research to drive 20+% ROIC • All excess cash returned to shareholders
• $1bn towards $4bn second program in 2016 and $5bn towards third program announced in 2017
In the event of a 25% downturn, GM can maintain investment in innovaIon, posiIve global EBIT, and pay its dividend Strong management team with a diversity of experience: • CEO: Mary Barra (35+ years with GM) • 50% of leadership team joined aWer 2009 with
substanJal finance, legal, or engineering experience
• 50% long Jme GM employees
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Current State of Auto Industry
United States (19% market share) • Record sales
• PotenJally overheated or incenJves driven • ShiW to SUVs/trucks
• 63% of market • Interest rates • Highest consumer confidence in 15 years
Mexico (20% market share) • 20% YoY growth rate • Record sales in December 2016
China (15% market share) • Record sales • Concerns about higher auto taxes • SUV & MPV growth • 162% sales growth in New Energy Vehicles
(NEVs) in 2016 • China already has 172mm vehicles on its
roads, compared to 265mm in the US China Sales
North American Sales
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Future state of the auto industry: $1.5 trillion
OEMs (Original Equipment Manufacturers)
• Partner with ride sharing fleets & technology companies • Offer operaJonal experience and capacity to deliver at scale • Benefits from a preference to work with one manufacturer
AutomaIon
• High cost savings • Technology and regulatory challenges
Sharing Services
• 1 in 10 cars sold in 2030 will be a shared vehicle
Electric • Stricter regulaJons and decreasing
ba[ery costs • Prevalent charging staJons
ConnecIvity • Internet of Things: Plalorm for
communicaJon and entertainment
Advantage for GM with global trust, strong cost management, and opera:onal capacity
CompeIIve Advantages
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KEY TAKEAWAYS
Commitment to cost management
CollaboraIve supplier relaIons
Inventory management
Excellence in Efficiency
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Focus and follow through
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• TargeJng $5.5bn in cost efficiencies by 2018 (4-‐year plan) for sustainable growth
• Achieved $3.7bn through 3Q16 (ahead of
target) so raised target by $1bn
• Total $3bn savings net of investments in brand, engineering, and technology
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• Patented welding technique
• Raise ATP from $29,600 in 2016 to over $32,300 in 2023
• Save GM $2bn by 2018
• Unlike Ford, no plant retrofit required
Example: Reducing vehicle weight through aluminum to steel welding
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• 70-‐80% OEM revenue spent on input
• Supplier trust is key
• OneCost system: coordinated design to reduce costs
• Only GM improved supplier relaJonship in 2016
CollaboraIve supplier relaIons
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• Lean manufacturing
• Cost reducJon
• Avoids pressure to move cars through discounJng à higher ATP
• 2016 incenJve spending/ATP was 11.9%, far below domesJc compeJtors
• 2016 ATPs were $4,260 above the industry average
Inventory management
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GM AVERAGE TRANSACTION PRICE 2013 – 2016
KEY TAKEAWAYS
Diverse brands
Responsive global strategy
Excellence in Efficiency
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Brand Leadership
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Diverse brands
Luxury North America, China, Middle East
Upscale North America, China
Premium SUV/truck North America
Mass market Global
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• Awareness and quick response to changing consumer preferences and macroeconomic trends
• China • Introducing 60 new models through
2020 • Rolling out 10 new energy vehicles
(NEVs) • Russia
• GM exited Russia in 2015 because of the collapse of the Russian Ruble
Responsive global strategy
KEY TAKEAWAYS
Smart partnerships in technology
Electric cars for the mass market
ConnecIvity and crash data
Investment in InnovaIon
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• AcquisiJon of CruiseAutomaJon
• Investment in LyW
Smart partnerships propel autonomous driving
“Self-‐driving vehicles will be a $87 billion opportunity in 2030 and car maker profits will be more than $10 billion” – Lux Research
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GM vs. CompeItors: Autonomous Cars
Google Tesla Other OEMs
SMART PARTNERSHIPS
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Maven’s partnership with LyW and Uber
ELECTRIC CARS
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GM has the operaJonal experJse and capacity to cater to electric car demands, capturing a growing Chinese market
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2016 Chevy Volt 2017 Chevy Bolt EV
Type: Hybrid Mileage: 420 miles with hybrid funcJon, 53 miles pure electric MSRP: $33,220
Type: Electric Mileage: 238 miles pure electric MSRP: $37,495
GM’s Hybrid and Electric Automobiles
GM vs. CompeItors: Electric Cars
Chevy Bolt EV Tesla Model 3 Nissan Leaf
Year: 2016 Mileage: 107 MSRP: $30,680 – $36,790
Year: ProducJon begins mid 2017 Mileage: 215 MSRP: $35,000
Year: 2016 Mileage: 238 MSRP: $37,495
Investment in connecIvity and crash data
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GM’s OnStar and OnStar Go
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Industry EPS
GM EPS
$6.02 $5.42
$9.16
$22.56
$2.55 $1.62 $0.41 $1.38
$0.00 $1.85
$-‐
$5.00
$10.00
$15.00
$20.00
$25.00
$3.18
$4.12
$5.02 $5.50
$6.00
$-‐
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2013 2014 2015 2016E 2017E
$2.20
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Comparable company analysis
13%
19% 20% 17% 19%
23%
12% 14%
20% 23%
14%
0%
5%
10%
15%
20%
25%
Gross Margin
12% 15%
11% 10%
14%
8% 10%
3%
10%
2%
8%
0%
5%
10%
15%
20%
EBITDA Margin
9% 7%
5%
0%
7%
3%
5% 4% 4%
NM 1%
0%
2%
4%
6%
8%
10%
Net Income Margin
0.7x
1.2x 1.1x 0.9x
1.5x
0.8x 1.1x
0.4x
0.9x
NM 0.2x
0.0x
0.5x
1.0x
1.5x
2.0x
EV/Revenue
5.4x 7.5x
10.0x
7.3x
10.8x 8.8x 9.4x
11.5x
8.2x
NM 2.4x
0.0x
5.0x
10.0x
15.0x
EV/EBITDA
9.6x 12.0x
13.4x 11.6x
14.7x 14.8x 17.6x
15.7x
12.2x
NM
4.5x
0.0x
5.0x
10.0x
15.0x
20.0x
EV/EBIT
19% 10%
4%
0.9x 8.8x
13.4x
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ValuaIon AssumpJons
Terminal Growth Rate 2.25%
Tax Rate 26%
Market Risk Premium 8%
Risk Free Rate 3.75%
Beta 1.43
Cost of Equity (Re) 15.19%
Cost of Debt (Rd) 6.22%
Debt/Value 61.02%
Equity/Value 38.98%
WACC 8.73%
Enterprise value $133,769
Minus: Debt $63,111
Plus: Cash $15,238
Market value of equity $85,896
Number of shares outstanding 1,578
Implied share price $54.43
Current share price $37.30
Implied upside: 46%
$54.43 7.73% 8.23% 8.73% 9.23% 9.73%1.75% $64.84 $57.32 $50.87 $45.29 $40.422.00% $67.40 $59.40 $52.59 $46.72 $41.622.25% $70.18 $61.65 $54.43 $48.25 $42.902.50% $73.24 $64.10 $56.43 $49.90 $44.272.75% $76.60 $66.77 $58.59 $51.67 $45.74Te
rminal growth
WACC
$1.7 $1.8
$8.1
$5.7
$8.6
$11.5
$9.2 $8.9 $9.0$10.2 $10.4 $10.6 $10.8
$0
$2
$4
$6
$8
$10
$12
$14
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Projected free cash flow
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Cyclicality of auto industry
Demand for electric cars
AdopJon of autonomous vehicles
Car regulaJons
Currency risk and oil price fluctuaJons
PoliJcal risks
Risks
Excellence in efficiency
Brand leadership
Investment in innovaJon
Investment thesis
BUY: GENERAL MOTORS
GENERAL MOTORS
Appendix
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Projected Cash Flows
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Projected Revenue by Region