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August 25, 2018

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A Letter to Mary Barra

August 26, 2017

Dear Mary,

 

Let me start by saying that you’re doing an amazing job. From one Oakland County native to another, it’s been fun watching you progress. General Motors has been a well-oiled, profit generating machine over the last several years and you’ve been a major piece of the turnaround puzzle. You’re easily my favorite Chief Executive in the business world today. Tim Cook? He has some good ideas, but nah. Mark Zuckerberg? Talk about a one-hit wonder. Elon Musk? I mean, Elon “Pipe Dream” Musk? Nope. None of them can hold a candle to you.

 

This isn’t another plea for some convoluted stock split based on share classes. In fact, I didn’t read Einhorn’s full letter. I got about 20 words in and lost interest. You don’t need to try to outsmart the analysts. I’m confident that the analysts watching General Motors are set in their ways:

 

General Motors share price reaches $36 per share – Issue Sell Recommendation

General Motors share price falls below $30 per share – Issue Buy Recommendation

General Motors share price is between $30 - $36 – Text each other gifs of Elon Musk

 

Over the last seven years the S&P 500 Index has returned far greater growth than General Motors (see image below).

 

 

Admittedly, the image above doesn’t tell the entire story, as GM’s dividend yield has been over twice that of the S&P 500 index during the selected time-frame. Even so, when dividends are factored in the S&P 500 index has still produced far superior results.

 

This letter is requesting a simple, old school stock split. Since people generally view stock splits as a good thing, there’s a high probability that it would increase shareholder value and give investors the returns they are looking for. You could do a basic 2-for-1 stock split. Fund managers, who have been ignoring General Motors for years, probably would have no idea what happened, and would quickly scoop up some GM stock as it would be priced in the high teens. Or, you could strategize a little bit more and work some behavioral finance into the mix. Remember in 2014 when Apple did a 7-for-1 stock split? That left many investors puzzled with the numbers. The resulting share price of $86, however, was attainable for the masses. What Apple really wanted to do was to give people an easy price target. It left analysts with a not-so-lofty price target to go for: $100 per share (16% higher). This resulted in Apple quickly overtaking that hundred-dollar psychological target and then continuing to trend higher. I say make people wonder. I would propose a 3-for-1 stock split. Get General Motors’ share price near Ford’s and make the investors decide. With Ford’s recent hiccup with faulty vehicles, as well as their management’s lowered earnings guidance, now would be a great time to strike.

 

 

Based on the above comparison it’s apparent that General Motors is the better purchase on both an EPS basis and also a price-to-earnings ratio basis. When looking forward to the full year of 2017, analysts are predicting a much better year for GM than Ford as well. Sure, some investors will point to Ford's dividend and payout ratio being greater than GM's. That's all fine and dandy though, just let them know that you're choosing to put more money into research and development to be the market leader with autonomous vehicles.

 

People remember GM for going bust during the Great Recession. They also remember the price of General Motors after the crisis when the government was the reason it stayed afloat.  They remember GM hovering in the thirty-dollar range, cracking the low 40’s in late 2013 and then coming right back down into the thirties. It doesn’t matter that GM may be one of the best dividend plays out there. It doesn’t matter that your company is churning out record profits. And it clearly doesn’t matter that GM is obliterating analysts’ estimates. By now you should have realized that it makes no difference if General Motors earns a $2 billion-dollar profit per quarter or a $10 billion-dollar profit per quarter. Frankly, people don’t care about the automotive industry as it stands today unless the word Tesla is mentioned. Analysts are forward looking and want to try to predict the future. They’re looking five years out and ignoring the time in between. Will autonomous vehicles one day rule the road? Probably at some point, though I think the consensus estimates are expecting it too soon.

 

Want a tactic other than a stock split? Show the analysts that you are even more serious regarding autonomous vehicles and ride sharing. The Lyft investment was a major step forward and I applaud you for trying to get an even larger stake after the initial investment.  With Uber’s reputation on the fritz it appears that Lyft has room to improve upon its current market share. The Cruise Automation purchase for nearly $1 billion dollars was also a fantastic play.  How did the markets react? They didn’t. Odds are General Motors stock would have performed better had you paid MORE for Cruise Automation. Investors care about one thing and one thing only right now, and that is which company will be the king of the autonomous vehicle. Shelling out a heftier price tag would have given the illusion that General Motors was that company.

 

The markets don’t want General Motors to bounce back. They’re ready for something new. They want to see the T-word come in and knock GM out. Not me. I think General Motors still has a lot of fight left, but if you don’t do something to create shareholder value it could be a rapid descent, circa 2009. Unfortunately, with the next major recession GM may no longer be considered ‘too big to fail’, placing an increased importance on private investment, rather than a government handout. If the company can’t prove that it can create shareholder value during good times then it’s going to be rather difficult to find those investors in times of despair.

 

Sincerely,

Ross

 

Disclaimer – I own hundreds of dollars in both Ford and General Motors stock

 

 

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