General Motors Recommendation: Buy
Ticker: GM Price (04/27): $35.72
General Motors is the largest domestic manufacturer of automobiles with strong operations across Europe, South America and China. Despite a recent first quarter earnings miss, General Motors still remains an attractive investment opportunity. Three primary reasons back up this thesis. First, they have a strong growth potential due to favorable macroeconomic trends. Second, their industry potential, specifically in the United States, has grown stronger in the recent years as the lackluster recession years are left further behind. Finally, they compare favorably to the other top automobile competitors in valuation and operational effectiveness.
Key Assumptions in calculating the DCF model:
· Discount Rate, identify what you will use, the WACC, arbitrary rate, 10 Yr. Treasury identify which you choose.
· Perpetuity Growth Rate of Free Cash Flows, you can estimate but identify what you used.
· Tax Rate (from 10k) and WACC Spreadsheet
Include your stock price assessments from the DCF and DDM models in the analysis.
Macroeconomic Strengths
The automobile industry and thus GM are currently benefitting from favorable economic fundamentals. One of the biggest stories of the last six months has been the significant drop in oil prices. Though there has been a slight rally in the last couple weeks, oil still remains down by over 30% and, importantly, gasoline prices are down by 15% in the same period. Lower gas prices, all other things equal, decreases the cost of ownership which results in increased demand. The type of vehicle being purchased has also shifted dramatically to SUV’s and light trucks over smaller cars, which boosts the bottom-line due to the better profit margins on larger vehicles. Additionally, the low interest rate environment facilitates purchases through cheap auto loans while the continued drop in unemployment helps consumers regain the financial footing necessary to purch...
