On Wednesday, General Motors reported fourth-quarter and full-year 2016 earnings. For the quarter, GM beat expectations. Global sales for the past year were a record for the company.
And the market did what it has grown accustomed to doing with GM stock, sending shares into a dive (they had been rallying nicely as part of the so-called “Trump Bump”). The main source of concern is that GM’s North American profit margins eroded at the end of 2016, “to 8.4 per cent, from 10 per cent a year earlier,” Bloomberg reported.
On a conference call with GM executives after earnings were announced, Morgan Stanley lead auto analysts Adam Jonas noted that since GM’s 2010 IPO, the stock is up 6% versus the S&P500 rising 96%. In a research note published Wednesday, he reiterated that data point and opined that “4Q16 results offer GM’s history as a public company in a microcosm.”
“Execution and cash flow goes underappreciated by the market,” he said. “Does something more radical have to change to optimise shareholder value?”
During the Q&A session, we asked [CEO Mary Barra] the following: “Is there something radical or structural — like a change of business unit structure, legal organisation structure, like what Alphabet has done — something more radical that needs to be done to address the strategic concerns and risks discounted by investors, or to otherwise unlock hidden value?” Her answer, in summary, was to continue making the core business more efficient while positioning the company to take advantage of opportunities as technology transforms the business model. As we’ve highlighted in much of our previous industry research, we expect some OEMs may take a less subtle approach to creating an organizational structure by which it can attract human talent and capital while preserving and highlighting value to shareholders. We expect this industry debate to evolve and it is certainly not limited to GM specifically… but we believe investors will continue asking this question.
Effectively, Jonas was asking Barra if GM thinks it should break itself up into pieces, with some parts providing new value that would exceed what’s offered, disappointingly for investors he thinks, by the current whole. He was also asking if GM’s legendary status as a holding company of brands, established decades ago, still works for the automaker.
The template here is Fiat Chrysler Automobiles, which after its 2014 IPO staged a subsequent spinoff of Ferrari in an independent IPO for the Italian supercar brand that has yielded a return of 17% since 2015 and an 80% return over the past 12 months.
That’s what Jonas is talking about.
Of course, GM went bankrupt in 2009 and shed a lot of dead weight, in terms of debt and weaker brands. So there could be a reluctance on the part of GM’s management and board to start looking for ways to find a Ferrari inside the new company. And in any case, GM has been using its growing cash pile to do share buybacks and dividend hikes, rewarding investors who have been willing to stick with the carmaker.
Wall Street loves the idea of unlocking value through asset reorganization. And GM has relatively recent experience with the process. In 1999, it spun off its Delphi part unit as a separate company, publicly traded.
By 2005, Delphi was in Chapter 11. Four years later, it emerged from bankruptcy. It was one of the biggest catastrophes in US business history.
Would history repeat itself if GM spun off, say, Cadillac, or set up a completely separate unit for its new mobility efforts — ride-sharing and autonomous transportation — and undertook and IPO for those entities?
It’s hard to say, but the conversation has officially begun.
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