Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Can General Motors Survive Coronavirus?

General Motors (NYSE: GM) was in big trouble long before the coronavirus came. Now GM could be facing catastrophe for the second time in less than 15 years.

Notably, General Motors reported a -$554 million operating loss and a -$270 million net loss for the quarter ending on 31 December 2019. Additionally, GM’s revenue growth shrank by -19.72% in the same quarter.

Moreover, GM Chief Executive Officer Mary Barra and her team up are still cleaning up the mess left by past General Motors leadership. For example, GM will pay $120 million to settle more claims that faulty ignition switches cause accidents, Car and Driver reports.

General Motors Still paying for Ignition Switch Scandal

On the positive side, Car and Driver claims the $120 million is 1% of the $12 billion the plaintiffs’ law Hagens Berman asked for.

On the negative side, GM set aside $625 million to settle 124 death and 275 injury claims in 2014. Those claims also arose from the faulty ignition switches.

Plus, there is another $275 million payout related to the same ignition systems. Consequently, I estimate General Motors could pay $1.02 billion in just sets of ignition switch lawsuits alone.

GM is paying the lawsuits, because faulty ignitions caused sudden shut offs and accelerations in some of its vehicles. That caused accidents when vehicles stopped or ran out of control.

General Motors’ Battle with Trump

Now, GM (NYSE: GM) is in a huge conflict with President Donald J. Trump (R-Florida).

Trump is criticizing General Motors’ and Ventec Life Systems’ (TPE: 6672) efforts to manufacture breathing machines for hospitals, Bloomberg reports. Medical facilities could need the ventilators to treat Coronavirus victims. GM claims it and Ventec could manufacture 10,000 ventilators a month at the Kokomo plant, Business Insider notes.

GM and Ventec plan to build the ventilators at a parts plant in Kokomo, Indiana. However, Trump wants GM to reopen a closed car factory in Lordstown, Ohio, to build the machines.

Cynics, such as me, will think Trump is trying to get votes in Ohio; a state he needs to win to achieve reelection in November, rather than get the ventilators made. Notably, Indiana is a loyal Republican, or Red, State Trump will probably carry in November. Conversely, Ohio has a deep political divide.

Thus, Trump is playing politics with the ventilators and attacking GM and its workers in the process. Democrats will charge Trump with putting risks at lives at risk to buy votes.

On the positive side, General Motors claims it can make 50,000 surgical masks a day within two week and eventually produce 100,000 masks a day. Hence, GM can cash in on coronavirus by leveraging its manufacturing capabilities. However, politics could scuttle those efforts.

Is General Motors Making Money?

The financial data shows the General Motors Company (NYSE: GM) can make money.

For instance, General Motors reported a quarterly profit of $1.728 billion on 31 December 2019. Additionally, GM reported a quarterly operating cash flow of $3.473 billion and an ending cash flow of $44 million on 31 December 2019.

Impressively, General Motors had $23.243 billion in cash and short-term investments on 31 December 2019. GM accumulated that cash in spite of its problems. Hence, General Motors is still a cash-rich company which had $153.045 billion in assets at the end of 2019.

Consequently, I think General Motors has the resources to survive. However, that survival will be rough.

What Future Does General Motors Have?

To their credit, Barra and her team are making the tough decisions necessary to ensure GM’s survival.

In particular, GM sold its ailing European business in 2017. General Motors’ Euroepan subsidiaries Vauxhall and Opel lost $18 billion between 2001 and 2017, The Verge claims. Additionally, General Motors has killed poorly selling models and closed plants.

Importantly, General Motors is making huge investments in autonomous vehicles. In fact, The Verge estimated GM’s Cruise self-driving vehicle project was worth $19 billion in May 2019.

Impressively, GM secured $1.15 billion in investment for Cruise in Spring 2019, The Verge reports. GM’s goal for Cruise is the development of a fully autonomous vehicle. Major investors in Cruise include Softbank (OTC: SFTBY). Softbank invested $2.25 billion in Cruise in 2018, The Verge reports.

Is General Motors a Value Investment?

I think Mr. Market undervalued General Motors (NYSE: GM) at $19.02 on 2 April 2020.

To elaborate, I think General Motors is a cash-rich company with a lot of growth potential. However, I believe General Motors needs to suffer a lot of pain and losses because it recovers.

Interestingly, General Motors paid a 38₵ dividend on 5 March 2020. I think GM has a high margin of safety because of the dividend. Overall, each General Motors share offered a dividend yield of 7.89%, an annualized payout of $1.52, and a 39.66% payout ratio on 2 April 2020.

If you are looking for a bargain stock to buy in the age of Coronavirus, General Motors is worth investigating. Personally, I dislike GM, but this auto giant has a high margin of safety and good money making potential.