Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the EnterprisingÂ Investor with High Dividend Yields.Â Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how General Motors (GM)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â General Motors Corporation (General Motors) designs, build and sell cars, trucks and automobiles parts globally. The Company also provides automotive financing services through General Motors Financial Company, Inc. (GM Financial). The Company’s automotive operations meet the demands of the Company’s customers through its four automotive segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO) and GM South America (GMSA). During the year ended December 31, 2012, the Company’s total worldwide vehicle sales were 9.3 million. In March 2012, the Company acquired from Ally Financial 100% interest of GMAC South America LLC. In October 2013, Fiat SpA’s Fiat Group Automobiles completes acquisition of 50% stake in VM Motori SpA Held by the Company. In December 2013, General Motors Co sold its remaining 8.5 % in Ally Financial Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â PASS
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â PASS
- Earnings growth – EPSmg greater than 5 years ago -Â FAIL
|Value Based on 3% Growth||$43.68|
|Value Based on 0% Growth||$25.61|
|Market Implied Growth Rate||1.58%|
|Net Current Asset Value (NCAV)||-$28.41|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per Share – ModernGraham
General Motors is not suitable for either Defensive Investors or Enterprising Investors. Â The Defensive Investor has a multitude of concerns including the low current ratio, the lack of earnings stability or growth over the last ten years, and the short dividend record. Â The Enterprising Investor is concerned with the high level of debt relative to the current assets and the lack of earnings growth over the last five years. Â As a result, value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities through a review of ModernGraham’s valuation of Ford Motor Company (F). Â From a valuation side of things, theÂ company appears to beÂ significantly overvalued after seeing itsÂ EPSmg (normalized earnings) drop from $20.45 in 2010 to an estimated $3.01 for 2014. Â This demonstrated drop in earnings does notÂ support the market’s implied estimate of 1.58%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on General Motors (GM)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author held a long position in Ford Motor Company (F) but did not hold a position in General Motors (GM)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.