David Einhorn is the second activist to target GM in two years one chart explains why (GM)3/29/2017
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David Einhorn is the second activist to target GM in two years — one chart explains why (GM) http://ift.tt/2nv5CDZ Greenlight Capital's David Einhorn is gunning for General Motors. The investor has turned activist and rolled out an unprecedented proposal to create two classes of GM stock, one driven by growth and the other supported by a permanent dividend. After studying Einhorn's proposal for seven months, GM rejected the plan as well as his goal of getting four seats on GM's board. Thus far both Moody's and S&P have sided with GM's argument that Einhorn's idea would sink the carmaker's investment-grade credit rating and poses an unnecessary risk. GM has also insisted that two classes of stock would create management conflicts. Which group of investors would GM put first as it weighed big decisions? For CEO Mary Barra, this is the second go-round with an activist in just two years. In 2015, GM gave in to Harry Wilson's much more straightforward demand to increase the speed at which it was buying back its own shares. Andy Kiersz/Business Insider US auto sales have boomed, setting records in both 2015 and 2016, and through this expansion, GM has been steadily profitable, as consumers have favored full-size pickups and SUVs over low-margin passenger cars. The carmaker's market-share position in the US is also solid: it's the biggest carmaker, controlling nearly a fifth of the total market. Again and again, analysts have pointed out that GM is undervalued relative to its earnings. The company has addressed this by taking its free cash flow, above what it requires to keep adequate cash on the balance sheet, and returning it to investors through buybacks and a dividend yield now above 4%. Buying and not buyingRuben Sprich/Reuters Einhorn's is buying GM — Greenlight holds about 1% of the available shares, with options to take that 2.5% — but he isn't buying Barra and her executive team's financial strategy. He thinks there's a whopping $38 billion in additional market cap that could be realized if GM's accepts his plan (the company's current valuation is $54 billion). GM's languishing stock price is a mystery to many observers. The typical fear expressed now about getting in is that all the sales growth is in the rearview mirror and a downturn in the US will arrive soon. But that fear has been a constant feature of the auto industry for two years, even as new sales records have been set. If a cyclical downturn does take hold in 2017, the market is unlikely to fall below 15 million to 16 million in annual sales, and GM is structured to be profitable in a market that plunges to 10-11 million annually. And in any case, GM's mix of products, especially pickups and SUVs, would enable it to maintain relative profitability even if sales have peaked. The ultimate conclusion? GM is a victim of its own success. Einhorn sees great fundamentals but a stock price that the markets are getting wrong. He wants to do something about it. NOW WATCH: Clinton calls the GOP health care bill failure a 'victory for all Americans' See Also:
SEE ALSO: David Einhorn's terrible idea could not have come at a worse time for GM Business via Business Insider http://ift.tt/eKERsB March 29, 2017 at 02:09AM
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