Greenlight Capital – General Motors Co. – General Motors Company (NYSE:GM)

The following segment was excerpted from this fund letter.

General Motors (NYSE:GM) – Long

5.8x P/E on 2020 estimates, 4.2% dividend yield

We have owned GM for a number of years and our investment has underperformed the market (our return to date has been 10.6%, annualized). Every year the shares seemed cheap on an earnings basis, but cash flow ultimately came up short for one reason or another. An unprofitable region or two was sold or restructured, investments were made in new technologies, plants and product lines required capital investment, GM Financial required capital to grow, and pension plans were funded. All of these steps have led to a stronger company that can better face future economic and business challenges. However, the net result of so many cash needs is that while earnings have been good, cash flow has lagged.

Management recognizes this disconnect, and in early 2019, the company emphasized that cash flow must better match earnings. As we looked at the company’s forecast, we saw no more regions requiring expensive restructuring, and the above-normal capital and strategic investments appeared to be paid for. As such, we believed that by late 2019 the cash flow would again be significant enough to allow GM to recommence its share repurchase program. We half-asked and half-joked, what would cause cash to come up short in 2019? We couldn’t think of anything. And then a six-week-long strike hit that caused GM to miss its earnings forecast and come up woefully short on free cash flow – again.

And yet, we believe 2020 is the year where it all finally comes together for GM. The fullsize pickup truck and SUV platforms have been fully updated. Channel inventory is low and dealers need to rebuild supply that was reduced during the strike. The restructuring is complete. China sales appear likely to stabilize and ultimately recover. GM Financial is performing well and is over-capitalized and poised to start distributing 100% of earnings. While consensus estimates are for $6.36 per share in earnings in 2020, we believe earnings could surpass $7.00 in 2020 and finally – yes, finally – cash flow should also approach that level. As such, GM should begin repurchasing shares at a healthy clip, providing a tailwind for future EPS growth.

Not included in any of this is GM Cruise, which is still targeting a commercial launch of autonomous vehicles. We doubt the market has any optimism about GM Cruise, despite a $19 billion valuation in a May 2019 investment round. The recognition of GM Cruise as a source of material value is an additional way for investors to re-rate GM shares.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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