General Motors DCF and DDM



General Motors DCF and DDM

Introduction

General Motors Corporation is a global manufacturer, marketer, and distributor of cars, trucks, and parts. The company also engages in the provision of loans and other financial services, including consumer vehicle financing, dealership financing, residential mortgage services, personal and commercial insurance coverage, and more.

Market Analysis Update

Discretionary Industry Analysis: The consumer discretionary industry includes companies whose sales come from consumer discretionary income purchases. Discretionary income = gross income less taxes and necessities such as rent, mortgage and food (Viebig & Varmaz, 2008). Discretionary Trading Strategy: The consumer discretionary industry tends to be very sensitive to economic cycles. Look for undervalued discretionary investments during economic recessions when stock prices are low and sell discretionary investments during the late stages of a bull markets when stock prices are high. The global economy is currently in a recession, therefore, it is the perfect time to purchase consumer discretionary investments. Upward sloping stock charts and financial news may indicate a selling opportunity while the opposite means that stocks are becoming undervalued.

Discussion Analysis

As part of our process, we perform a rigorous discounted cash-flow methodology that dives into the true intrinsic worth of companies. In General Motors' (GM) case, we think the firm is fairly valued at $39 per share, significantly higher than where it is currently trading.

For some background, we think a comprehensive analysis of a firm's discounted cash-flow valuation, relative valuation versus industry peers, as well as an assessment of technical and momentum indicators is the best way to identify the most attractive stocks at the best time to buy. This process culminates in what we call our Valuentum Buying Index, which ranks stocks on a scale from 1 to 10, with 10 being the best (Stowe, 2007).

If a company is undervalued both on a DCF and on a relative valuation basis and is showing improvement in technical and momentum indicators, it scores high on our scale. General Motors posts a VBI score of 6 on our scale, reflecting the view that its price falls at the lower end of our fair value range, it has a neutral relative valuation versus peers, and its stock is showing bullish techinicals.

Our Report on General Motors

Investment Considerations

Investment Highlights

General Motors' average return on invested capital has trailed its cost of capital during the past few years, indicating weakness in business fundamentals and an inability to earn economic profits through the course of the economic cycle. We think there are better quality firms out there, but its valuation is compelling (Ghosh, 1995).

Though we'd proclaim the company as undervalued if its share price fell below $22, General Motors is trading at the lower end of our fair value range, suggesting valuation upside potential. We're not too fond of General Motors' weak cash flow generation and high financial leverage. Although this combination does not guarantee financial problems down the road, it could potentially be a recipe for disaster during tough economic times (as we've only recently seen).

Although we think there may be a better time ...