The second day of the Value Investing Congress resulted in mostly headlines about David Einhorn shorting Chipotle (CWG), since that was the only thing he shared that seemed new and sexy, but he and several other presenters also shared some interesting thoughts that stood out for me about a few of the victims/villains of the financial crisis and their current valuations.
Einhorn came out with a long thesis on General Motors (GM) and reiterated his short opinion on Moody’s (MCO), Glenn Tongue updated his and Whitney Tilson’s enthusiastic “buy” on AIG, and Jeff Ubben of ValueAct went the other way in saying that the only way he likes getting into the financial sector is through Moody’s (and another less financial service company, CB Richard Ellis (CBG)).
First, on GM — Einhorn’s argument is that because GM is an “ugly duckling” that investors hate, and investors always have long memories about this stuff, and because of the “government overhang” effect that is overstated, but it is much healthier now and GM has a lot of cash and cash flow.
And, more importantly, GM has tailwinds both because of the expected substantial recovery in auto sales from very depressed levels and because of their product refresh cycle, which generally increases sales.
GM, thanks to the bankruptcy, is much more streamlined and has much lower fixed costs and a workforce that is 25% smaller than before — they’re set up to break even in a world where nine million cars are sold per year in the US, and that was the lowest run rate of sales in the worst month of the recession, he thinks that a better mid-cycle estimate for car sales is 16 million per year given demographics and the extended age of the US fleet, and if it gets that tailwind that’s $2 billion in profits that he thinks analysts aren’t expecting (an extra $1.10 per share).
They also have a large number of new products now that they’re fully refreshing after bankruptcy, with 60% of their models either new or refreshed over the next two years, substantially more than most carmakers.
And with a high cash position and valuable tax losses, he thinks the “real” enterprise value is down around $5-6 billion (the reported EV is just under $20 billion, they have net cash of about $17 billion to offset their $37 billion market capitalization) ...