Fri, 10 Mar 2017
With the sale of Opel-Vauxhall, GM continues with its strategy of exiting unprofitable markets. Plus, Harrison is in at CSX, and Brazil weighs on Anheuser-Busch Inbev.
Jeremy Glaser: GM pulls out of Europe; CSX gets a new conductor; and Anheuser-Busch Inbev looks undervalued. This time on the Morningstar Weekly Wrap.
After years of losses, GM is pulling the plug on Europe by selling its operations there. Dave Whiston thinks the move makes sense and sees values in the shares today.
Dave Whiston: GM announced on Monday its long-rumored deal its Opel-Vauxhall business to Peugeot PSA. I actually really like this deal a lot. I know GM gets some criticism for no longer being a global automaker and whatnot, but I care much more about profits than being the biggest automaker. A really staggering statistic is that GM has lost over $22 billion in the 21st century in Europe. They have never made an annual profit in Europe in this century. Frankly, they weren't going to anytime soon, either. They were hoping at best break even next year. The Brexit headwinds here, the industry over in Europe, it's very, very competitive. GM doesn't have premium pricing from brands, so honestly, a turnaround, a meaningful profit in Europe, I think was still a long ways off. This is just another example of a strategy management's been doing for quite a while now, just on a more dramatic scale, of exiting unprofitable markets that aren't going to turnaround anytime soon.
This was an expensive exit though. They had to pay $2.8 billion to true up the pension for the part that's going over to PSA. They're going to keep the retiree pension. On top of that pay a $400 million premium to compensate Peugeot for that risk. On the up side, they're going to get warrants in Peugeot with just a one euro strike price. They can start exercising those five years from when the deal closes, and that allows GM to get some up side should they combine PSA Opel-Vauxhall, all be very successful.
Glaser: Former Canadian Pacific CEO Hunter Harrison is taking over as the chief of CSX. Keith Schoonmaker thinks the turnaround expert will have a positive impact on the wide-moat firm.
Keith Schoonmaker: This has been the biggest story in transports this year. We awarded Hunter Harrison CEO of the Year Award in 2013 for his remarkable work at Canadian Pacific as well as his prior work at Canadian National and the Illinois Central. CP under his leadership improved its operating ratio a remarkable 23 percentage points in five years, and its marketing cap tripled. However, we believe at CSX, share price already incorporates a lot of improvement, and it's trading near our $48 fair value estimate. We suggest investors consider Union Pacific, which is trading at a discount to our fair value estimate, offers the highest rail dividend yield and boasts a wide moat.
Glaser: Anheuser-Busch Inbev had a mixed fourth quarter as issues in Brazil continued to weigh on the firm. But our analyst, Phil Gorham, thinks that the slow Brazilian economy is to blame here, and not a weakening of the firm's competitive positioning. With the rebound in prices of some important Brazilian commodity exports, there could be some better consumer growth later this year. Gorham still sees long-term value in the firm and thinks the shares trading an attractive entry point today.
On Saturday, don't miss the Morningstar Retirement Readiness Bootcamp, where we'll walk you through practical steps to see if your retirement plan is on track.