General Motors (NYSE: GM) is a strange company, Warren Buffett and George Soros think it is a great value investment. Yet GM lost $20 billion in Europe over the last 17 years, Quartz writer Jason Karaian estimated.
General Motors has not made money off vehicle sales in Europe since the 20th Century; an analysis by Karain indicates, yet it waited until March 5 to sell its European Division. That division includes two storied brands Germany’s Opel and Britain’s Vauxhall, a European financing division, 11 manufacturing plants and an engineering center.
GM will probably lose money off the sale to France’s PSA Group, a Washington Post article indicates. General Motors will incur non-cash accounting charges of $4 billion to $4.5 billion, yet Opel and Vauxhall are only worth around $2.3 billion.
Auto Sales in Europe Good, GM’s Sales Dismal
Interestingly enough the sale is coming as car sales are increasing in Europe. Best Selling Cars reported that passenger vehicle sales in the European Union increased by 10% in January 2017. On January 1, 2017, Germany even reported a record number of car registrations 45.8 million in a country of 80.62 million.
Opel was still the second most popular car in the Federal Republic, but its sales are dropping. The number of Opels registered in 2016 fell by 1.7% to 10.1% of the vehicle fleet, well behind Volkswagen which accounted for 21.6% of the cars on Germany’s roads. There are currently around 9.74 million Volkswagens and 4.687 million Opels in Germany.
Yet the market is not growing fast the number of cars in Germany increased by just 1.6% in 2017, indicating that demand is not there. To make matters worse, Germans simply are not buying new cars the average age of a vehicle in the Federal Republic increased in 2016 from 9.2 years to 9.3 years. That shows that the demand is simply not there in Europe’s largest economy.
The European car market is also complex and highly competitive, over 400 new car models were for sale in the UK alone in 2016 with 70 model launches planned for 2017. UK car sales were up by 2.25% in 2016 to 2.692 million.
Has Income Inequality Doomed Vauxhall and GM in Europe?
Vauxhall was still the second most popular brand in Britain but its sales fell by 6.97% in 2016 and its market share was just 9.32%, Best Selling cars reported. It is also not very competitive with German Brands BMW sales in Britain increased by 9.08% and Mercedes-Benz sales by 16.92%.
General Motors is in a sorry situation in Europe especially the UK. One reason for Vauxhall’s problems might be income inequality. The biggest vehicle sales increases in Great Britain were for luxury brands, Jaguar sales grew by 45.37% and Land Rover sales by 19.47% which is good news for Tata Motors (NYSE: TTM).
Yet working class brands like Citroen and Ford (NYSE: F) saw less demand. Ford’s UK sales fell by 5.06% in 2016 and Citroen’s by 21.27%. Volkswagen also saw its UK sales drop by 7.49% while upscale German brands like BMW, Audi, Mercedes and Porsche experienced sales increases. Even Toyota saw its British sales fall by 1.99%, as did Peugeot which experienced a 5.49% drop in sales.
A major problem for Vauxhall and Ford might be that working class and middle class Brits can simply no longer afford new cars. That calls its whole business model and PSA’s (which owns Citroen and Peugeot) into question. A big problem for GM is that its luxury brand, Cadillac, has never been very popular or successful in Europe. Cadillac is largely tailored to American tastes – making it a tough sale outside North America and with many US drivers.
Another is that GM has never heavily marketed SUVs heavily in the United Kingdom. SUV’s appear to be the fastest growing segment of the British auto market, Jeep’s sales in the UK increased by 30.54% in 2016. That bodes well for Fiat-Chrysler (NYSE: FCAU) but not General Motors.
So is GM a Good Investment?
Okay so what do Buffett and others see in General Motors? Berkshire Hathaway (NYSE: BRK.B) owned around 50 million shares of GM in third quarter 2016.
My guess is that they like the growth GM has been experiencing every but Europe. General Motors’ revenues grew by $14.02 billion in 2016 rising from $152.36 billion in December 2015 to $166.38 billion at the end of the year. That should easily cover any losses from the European fire sale.
GM is also making money; it reported a net income of $9.427 billion in December 2016, down slightly from $9.687 billion in December 2015. Yet still far better than the $3.949 billion in December 2014, that’s right GM’s net income is $5.478 billion higher than it was just three years ago.
Nor is it just net income, General Motors has a lot of float in the form of $24.8 billion in cash and short-term investments, $17.14 billion in cash from financing, $16.54 billion in cash from operations and $221.69 billion in assets at the end of fourth quarter 2016. For all its fault GM is a cash rich company, which is why Uncle Warren likes it.
Buffett is right, GM is a Good Investment
That cash is growing too, cash and short-term investments went from $23.4 billion at the end of 2015 to $24.8 billion at the end of 2016. Cash from financing grew from $13.69 billion in December 2015 to $17.14 billion a year later. Cash from operations shot up from $11.69 billion in December 2015 to $16.55 billion in December 2016.
No wonder Uncle Warren likes this company, it has a lot of cash, its stock is still fairly cheap (trading at $37.09 a share on March 9, 2017) and it paid a dividend of 38¢ on March 8, 2017. Investors received a return on equity of 22.13% on December 31, 2017 and a dividend yield of 4.1% on March 9, 2017.
So General Motors is a pretty good stock, and a well-managed company who knew? The pullout from Europe is a very smart move because the auto market on the continent does favor the kind of brands it has to offer. Note this doesn’t mean I’ll buy its cars, I still hate Cadillacs and despise Chevy and probably always will.
You won’t go wrong buying General Motors stock right now. Although I still think Ford; which was trading at $12.50 a share on March 9, 2017 is a much better deal.