Forget being identified as a company with a share price at a 52-week low – this week General Motors (GM) were identified as a company with a share price at a 53-year low. Goldman Sachs issued a “Sell” rating expressing concerns about the broad auto sector and suggesting GM may need to raise capital. The broad auto sector issues can be summarised by this quote from a CIBC economic report on oil prices – “Over the next four years, we are likely to witness the greatest mass exodus of vehicles off America’s highways in history. By 2012, there should be some 10 million fewer vehicles on American roadways than there are today—a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks.” Any forecast growth for GM isn’t coming from the US market.
GM’s revenues decreased from US$195.3 billion in 2004 to US$181.1 billion in 2007 – a (2.5%) compound annual growth rate. Our assumptions of revenues for the next three years are US$173.75 billion in 2008 growing to US$190.25 billion in 2010 – a 4.6% compound annual growth rate (2008-10). We have projected EBITDA margins of 4.5% in 2008 then a flat 5.5% moving forward. We have used a terminal growth rate of 3%. We calculated this terminal growth rate based on year three growth of 3.5% dropping to a 3% stable growth rate by year 10. Our view is that this growth is coming from outside the US market – GM has approximately 60% of sales from international (i.e. non-US) markets. We used a terminal capital expenditure number of US$8.5 billion. We have used a WACC (discount rate) of 9.5%.
Our analysis incorporates the cash and debt on the GM balance sheet – Valuecruncher calculates a net debt number.
Our analysis gives a valuation of US$10.49 which is 9.2% below the current share price of US$11.55.
GM presents an illustration of the sensitivity of key inputs for a discounted cash flow (DCF) model like we use here at Valuecruncher. There are a range of key assumptions where small changes can make significant changes to the valuation. The most significant of these in our model is the EBITDA margin in 2010. If GM can get the EBITDA margin to 6.0% in 2010 (we are projecting 5.5%) then, with all other assumptions constant, we produce a valuation of $26.03 (125% above the current share price). However if we reduce the EBITDA margin to 5.0% in 2010 we place a zero valuation on the GM shares. This doesn’t make the analysis less valuable – it simply illustrates the areas where there are opportunities and risks associated with the on-going GM financial performance.
Based on our analysis the current valuation looks slightly overvalued – but very sensitive to the assumptions identified (especially EBITDA margins). If GM can beat the numbers identified then there is potentially significant upside – if they can’t then the future could look bleak. Play with our assumptions – what does your analysis say?