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GM's Bigger Story Is Beyond the Headlines

David Whiston, CFA, CPA, CFE

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David Whiston: There is lots of talk about with the new GM. It is the cheapest stock in my coverage and the recent recall scandal certainly raises headline and litigation risk, but I think there is very attractive turnaround story going on if you look beyond the headlines.

The new Chevrolet Impala is a great example of what's going on at the new GM. Consumer Reports last year tested it, and gave it a score of 95 out of 100. It won in its category as one of the best vehicles overall that the magazine tested. In fact, they even compared it to luxury sedans, like the Jaguar XF.

The Cadillac CTS is another great example; a great rebirth is going on with that brand. The CTS now gets similar pricing to BMW 5 Series or a Mercedes E-Class, and that better pricing means less incentives and better margin.

Now profits matter more than market share, and the new GM doesn't overproduce like old GM because its cost structure is far leaner. One of my favorite statistics is that old GM needed U.S. industry sales of 15.5 million units and 25% U.S. share just for GM North America to break even. Today GM needs 10 million to 11 million units of industry sales depending on mix and just 18% to 19% share.

So think about that. U.S. auto sales can go back to 2009 levels of 10.4 million units when capitalism almost collapsed, and GM today would just break even rather than hemorrhage billions of dollars. There's still more work to do today, though, as GM has the size but not the scale of an automaker that sells nearly 10 million vehicles a year. To that end, GM is getting more scale by moving more of its volume to core global platforms.

This turnaround will take time and there will be more bad headlines because of the recall litigation, but in the meantime GM has initiated a common stock dividend this year of $1.20 per share, so investors are getting a very respectable 3.5% dividend yield, and they are getting paid to wait for this turnaround to unfold. Now as for the recall, it's certainly possible fines of few billion dollars or several billion dollars could happen, but when you spread that out over 1.85 billion diluted shares, it is not a huge detractor to my fair value estimate.