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General Motors Company Message Board

  • wngr123 wngr123 Jun 20, 2013 2:15 PM Flag

    Webby: See if you agree

    I was thinking about a couple of your posts about the government accepting a worthless stake in the company in exchange for the elimination of $42 billion in debt (yes, I actually do think about some of your posts believe it or not). I say $42B because they paid $7B in cash towards the entire debt of $49B.

    Following my earlier posts about valuating companies, what would be GM’s value if we use a 5-7 multiple of EBITDA? Since 2009 was so messed up with successor/predecessor transactions, I thought 2010 might be a better year to look at. In 2010, EBIT was $7.5B and depreciation was $6.9B, giving us EBITDA of $14.4B. The range of values would then be $72B – $100.8B. If we take the low side of the range, i.e., $72B and the government took 62% of that, the equity stake would have been $44.6B. Pretty close, eh?

    Part II to follow:

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    • jeyebolt2003@ymail.com jeyebolt2003 Jun 21, 2013 4:32 PM Flag

      I soiled myself you know.

    • ((((I was thinking about a couple of your posts about the government accepting a worthless stake in the company in exchange for the elimination of $42 billion in debt (yes, I actually do think about some of your posts believe it or not). I say $42B because they paid $7B in cash towards the entire debt of $49B. Following my earlier posts about valuating companies, what would be GM’s value if we use a 5-7 multiple of EBITDA? Since 2009 was so messed up with successor/predecessor transactions, I thought 2010 might be a better year to look at. In 2010, EBIT was $7.5B and depreciation was $6.9B, giving us EBITDA of $14.4B. The range of values would then be $72B – $100.8B. If we take the low side of the range, i.e., $72B and the government took 62% of that, the equity stake would have been $44.6B. Pretty close, eh?))))

      Wngr,

      Seems to me, that extrapolating GM's current earnings can only give us unrealistically high expectations for GM stock going forward.
      I do not prefer to base valuations on current earning levels (thin, though they are) that were only made possible by their MASSIVE IRS tax offsets.
      What happens to your valuation model once GM's tax credits run out, and GM has to pay real income taxes again....... like any other US company has to pay?
      It must suck, knowing GM can only achieve a 1.45% operating margin with total federal tax forgiveness.
      Knowing that 35% US corporate tax rates await them, what does this do to your assumptions? I would assume it blows them right out of the water.

      /mm

      Sentiment: Strong Sell

      • 1 Reply to the_moolah_mullah
      • "I do not prefer to base valuations on current earning levels (thin, though they are) that were only made possible by their MASSIVE IRS tax offsets."
        The first valuation using EBITDA is not affected by tax rates since it is Earnings Before Interest, Taxes, Depreciation and Amortization.

        "Seems to me, that extrapolating GM's current earnings can only give us unrealistically high expectations for GM stock going forward."
        It sounds like you think something is fundamentally wrong with the company. Can you be specific (hopefully involving factual matter, not bias)?

        "It must suck, knowing GM can only achieve a 1.45% operating margin with total federal tax forgiveness."
        I don't know where 1.45% operating margin came from, but I hope you aren't taking that from 2012. As has been already discussed, operating income was grossly distorted in 2012 due to the accounting entry to reverse Goodwill. The offsetting entry was a tax benefit of $34 billion making net income of $6.3 billion. As further proof that ordinarily operating margin is more than double that, in both 2010 and 2011 it was 3.8% without the distortion of the Goodwill accounting change.

        "Knowing that 35% US corporate tax rates await them, what does this do to your assumptions? I would assume it blows them right out of the water."
        First of all, even though the nominal rate is 35%, no company pays that. I think you'll find that the effective rate is normally more like 20-25%. Secondly, you can see that none of the methods of valuation include net income, so tax rate is independent of my analysis. True, cash flow would be affected by the amount of taxes paid, but as I recall, the credits wouldn't run out until 2017 long after the government will be out of the business.

        Don't forget that the basis of my calculations was whether the government got a decent deal at the point of debt conversion, i.e., was 62% of the company worth $42 billion in 2010. It wasn't an attempt to talk about the long term

    • Part II

      For a slightly more sophisticated look at it, I was thinking that the worth of the company might be equal to the hard assets plus the net present value of the anticipated cash flows. For hard assets I added the cash, marketable securities, receivables, restricted cash (current portion only), and inventories. Basically this is the current assets less things like assets held for sale, equipment on leases, and deferred income tax. This amounted to $54.3B.

      The next thing is to calculate the NPV of operating cash flow for a period of time. In 2010, cash flow from operations was $6.6B. Now we need to decide for what time period we want the NPV for. Most PE companies see a horizon of 3-5 years of ownership and if the UST saw themselves as a PE company (I almost can’t say that with a straight face) let’s say they saw 3 years which in fact is the way it’s turning out. For a discount rate, which is the rate that would represent alternative uses of capital, let’s us 10% which is not uncommon. Using my handy dandy NPV calculator, that works out to a NPV of $16.4B.

      So, add the $54.3B in hard assets to the NPV of cash flows of $16.4 and you get a company worth $70.7B, 62% of which is $43.8B.

      I’m sure a much more complex and intense system was used to figure of the worth of the company in 2010, but it’s pretty amazing, to me anyway, that these numbers came out so close.
      My conclusion is that in 2010, the UST received a fair stake in the company in exchange for the debt owed. Yours may be different, if so, how would you change the methodology of valuation? Obviously the open stock market isn’t valuing GM at the same level, I can’t hazard a guess why but we both know a lot of other factors are involved in stock prices like macro factors, emotional factors, etc.

      • 3 Replies to wngr123
      • An addendum:
        I got to thinking some more that just using hard assets and cash flow might not present a fair situation. So maybe using stockholder’s equity plus NPV of cash flow might be a better methodology.

        In 2010, stockholder’s equity was $37.2B. Changing the NPV calculation just a bit to 5 years and a discount rate of 5% gives us $29.0B for a total of $66.2B. The UST’s share of 62% yields $41.0B.

        Again, pretty close.

      • Bottom line...GM is way undervalued and the govt got a good deal. In the next 17 years, more cars will be made than ever before...(4x more than what is on the road today) GM is positioned well. The stock price will eventually catch up to the true valuation of GM and the nashing of teeth about how the tax payer was screwed by GM will disappear much like the chattered about B/K2 disappeared...just like Mikey disappearing....yada yada yada

      • Wngr,

        Intriguing. Can't digest this right now as I'm trying to wolf down lunch. However, will check it out later.

        /mm

        Sentiment: Strong Sell

 
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