- Greelight Capital’s David Einhorn is bulking up in GM.
- GM stock has been rallying of late but has gravely underperformed relative to a major market index.
- The GM executives could come under extreme pressure in 2017, even as US sales and profits boom.
Greenlight Capital’s David Einhorn could be gearing up to push for changes at General Motors.
I spotted this news at Seeking Alpha, where contributor “S. Hilgemann” took note of Greenlight’s most recent 13F filing with the SEC. GM was the third biggest position at Greenlight at the end of the fourth quarter, with the fund holding a $US458 million stake.
The specifics are less important than Einhorn’s motivation, which he made clear in his latest letter to investors, as Business Insider’s Matt Turner and Rachael Levy reported last month:
“GM’s valuation is extreme: at its year-end price of $US34.84 per share, GM trades at less than 6x earnings. It is rare for a company to pay out only a quarter of its profits in dividends and still yield 4.4%. GM has substantial foreign operations that (other than China) barely contribute to profits and could improve over time. Finally, we believe that GM can unlock substantial value through modest changes to its capital structure.”
For what it’s worth, GM could be preparing to unload its European division, Opel/Vauxhall. And Einhorn’s comments were echoed by Morgan Stanley lead auto analyst Adam Jonas, in a research note published after GM reported yet another profitable quarter to end 2016, amid a booming sales market in the US. Jonas seemed to suggest a reorganization or possible sell-off/spinoff of GM assets.
The type of potential agitation signalled by Einhorn taking control of over 2.5% of GM stock, according to the Seeking Alpha’s reading of the 13F, has been a long time brewing. As Jonas has written, while the S&P 500 has skyrocketed, GM shares have languished. The stock has been rallying of late, helped by positive sentiment fuelled by expectations around Trump tax cuts and regulatory rollbacks. But it’s still up only 9% since the automaker’s post-Chapter 11 IPO in 2010.
Investors have been rewarded with share buybacks and dividends (the yield is over 4%), but a perpetual fear of a sales downturn has been a drag on the stock price, even with back-to-back record setting US sales years in 2015 and 2016, and with GM maintaining its number-one position in North America in terms of market share at about 18%.
Pressure on the C-suite
For a while, I’ve figured that this situation isn’t sustainable and that eventually the GM management team and board would come under pressure. In 2015, GM used increased buybacks to stave off the efforts of an activist shareholder, Harry Wilson, to obtain a board seat. That same year, Fiat Chrysler CEO Sergio Marchionne, who thinks there’s too much global automaker capacity and technological redundancy, unsuccessfully tried to get GM and FCA to merge.
Now Einhorn controls enough stock to roil GM’s management team, an unfortunate prospect given that CEO Mary Barra oversees the best leadership group in the company’s history. This of course is the price of being a public company: no matter how effective a group of executives is at executing on a strategy — and Barra’s emphasises the highly disciplined use of capital — if the stock doesn’t move while the cash piles up, activists such as Einhorn are going to see opportunities to raid the coffers and shake up the C-suite.
Everyone I’ve talked to in the auto industry thinks that 2017 will probably be the year that the US market plateaus, prior to a downturn. In 2016, a record 17.55 million new cars and trucks were sold, and while 2017 could maintain that sales pace, the market is unlikely to surge toward or past 18 million.
This sets up GM’s management team for the ultimate test, something that it’s well aware of. GM’s Vice-President Mark Reuss zeroed in on this when I asked him about the health of the company at the Detroit auto show in January. He said that the company won’t know how good it is at running its far-flung interests until a downturn arrives.
The possible sale of Opel could be Barra’s and the board’s means of getting out in front of activist agitation — the division, part of GM since before World War II, would fetch billions and further fortify an already solid balance sheet, given GM some breathing room to maintain 10% profit margins while still spending enough on incentives and discounts to avoid losing US market share.
Europe hasn’t performed up to expectations since the recovery from the financial crisis began, and unloading Opel would allow greater focus on GM’s two biggest markets, the US and China.
That’s speculation at this point. But after fighting to recover from bailout and bankruptcies, GM could be facing a whole new set of struggles this year. And Einhorn’s involvement brings a nightmare scenario into play.
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