Financial Analysis of General Motors Company - Case Study Example

COVER PAGE COMPANY ANALYSIS AND VALUATION (FINANCIAL ANALYSIS OF GENERAL MOTORS COMPANY) STUDENT’S NAME: PROFESSOR’S NAME: COURSE TITLE: DATE: Table of Contents 1.0 COMPANY OVERVIEW 3 1.0Industry Trends and Prospects 5 1.1challenges facing the Automotive Industry 6 1.2The changing consumer expectation 6 1.3technological advances in the automotive industry 7 1.4projected growth of the Automotive Industry 8 2.0FINANCIAL ANALYSIS 9 2.1Profitability 9 2.2Liquidity 12 2.3leverage 15 2.4General Motors against the competitors 15 2.4strategy and the Growth model of General Motors 18 3.0Company Valuation 20 3.1the PE Multiple Valuation 20 3.2an analysis of the Dividend increment model valuation 21 3.4the Dividend Growth Model of General Motors Company 22 3.5a critical analysis of the Dividend increment Model valuation 23 3.6Sensitivity Analysis 24 3.7the Rappaport Shareholders Value Analysis 25 3.7analysis of Rappaport SVA model of the company 25 3.8the Sensitivity Analysis of the Rappaport SVA Model 26 4.0conclusion 28 5.0BIBLIOGRAPHY 30 1.0 COMPANY OVERVIEW The General Motors often abbreviated as GM is an American multinational automotive company whose headquarters are located in Detroit, Michigan. The company designs, manufactures and also distributed commercial and also passenger vehicles, motorcycles, engines and also turbomachinery. Also it offers related services which include financing, leasing and also fleet management (Madlani, J., and Ulvestad, J.C.A., 2012). There have been significant developments in the company. For instance, in the year 2012, the company produced the largest number of motor vehicles globally. It was ahead of Toyota and also Volkswagen Group. Typically, GM sells passenger cars. Their favourite brands include Alpheon, Chevrolet, HSV and Wuling and many others. Besides, the company has also two main divisions which are the Automotive Division and the Financial Services division. The company also has operations in more than 150 countries. It also operates 100 production facilities across 27 countries. The financial services sector generates annual revenue of close to $20,450 which indicates a 10% of the company’s total revenue. The other division produces the remaining 90% which makes the company have an annual estimate of around $172,822. However, GM has 12 brands, the most prominent brand which contributes to the company sales in the generation of revenue is the Chevrolet. For instance, Chevrolet contributed to 59% of the total income of the business in the financial year 2014. The organizations activities are global However the company is based in Chinese market via the joint ventures. Fig 1: contribution of each brand (FY 2013) The vehicle sale by geography indicates that the primary markets for the organization are in Europe. Fig 2: GM sales by region (FY 2014). China region contributed to 12% of the total sales while Canada was the second with 6.3% (Madlani, J., and Ulvestad, J.C.A., 2012). 1.0Industry Trends and Prospects With the rising legislations especially about environmental conservation and also from the customers' concerns about safety and pollution, there has been a big change in the automotive industry activities. More research and development has been enhanced thus developing environmentally sustainable products and also efficient processes for making the products. Besides the challenges facing the group, the group remains optimally positioned to deal with the rapid developments in the automotive industry. Considering the company’s strengths particularly its unique brand portfolio and the very many ranges of car models it makes the company is likely to continue growing (Godfrey, K.R., 2016). There is a prospect of the GM moderately increasing their deliveries to their customers especially in 2016. Considering the economic conditions, Volkswagen group expects their 2016 sales revenues to increase by up to 6%. However, there is a need for the company to monitor their sales trend, especially with the current pollution scandal. 1.1challenges facing the Automotive Industry There are various challenges which affect the general automotive industry thus influence the growth of the industry. These challenges can be categorized into four subdivisions namely, External, Competition, customer and finally Industrial. The external challenges include legislations for safeguarding the environment, costs of raw materials and also energy. Secondly, the challenges offered by the customer have reduced loyalty especially when the brand name is tarnished, reduced demand for the products and finally pressure of the vehicle prices mostly in the established markets. The third challenge is competition especially due to companies which are aggressive entering the market. The industrial problem affecting the industry includes uncertainties and more marketing leaders which are selecting the Asian markets thus offering stiff competition. 1.2The changing consumer expectation The trend in the demand for automotive products is widely changing. There has been a rise in demand especially from the loyal customers for the best car brands especially Alpheon and Chevrolet. Consumers are moving from the high-fuel consuming brands to the low-fuel consuming brands which do not have adverse impacts on the environment (Baldi, S., and Borgman, H., 2001). Besides, there has been a decrease in the customers’ loyalty amongst all the brands due to the emission scandal which hurt the group badly. New aggressive entrants to the automotive industry are subjecting General Motors to stiff competition especially on the price and product range. This has driven to the General motors to widen their goods in the industry. 1.3technological advances in the automotive industry The whole auto industry is employing the rapid technological advances so as to develop their products regarding performance, comfort, environmental effect and also consider safety. The mobile phone technology has been employed in the automotive industry so as to automate some of the machines. The development of technologies which promote the safety of the user is leading to the development of systems. There has been the development of systems such as self-driving and also blind spot detectors which have considerably improved the safety of the user. Besides, competition in the automotive industry is leading to the development of automotive products which are friendlier to the ecosystem. More technologies have been employed to monitor the emission of poisonous gasses to the atmosphere by applying technologies facilitating effective fuel consumption. Lightweight materials have also been used as a way of improving the overall performance of the automotive products. 1.4projected growth of the Automotive Industry Fig 3: showing the projected growth of the automotive industry from 2014 to 2021 The sales of cars are expected to grow by almost 7% each year. With the improving labour markets and the low-interest rates globally, there are good economic signs for the automotive industry to grow largely. With also the prices of gasoline projected to decrease globally particularly in the US, the automated industry is anticipating of more sales of vehicles especially the profitable trucks and sports cars. 2.0FINANCIAL ANALYSIS 2.1Profitability The annual revenue for the company has increased in the last five years from € 113 billion to more than €200 billion. This is an annual growth of almost 14.00%. This development is a good indication of how General Motors Company has increased its sales from the year 2012 to 2014. However from the above figure, it is evident that this company was affected by a financial crisis in the year 2009. The company experienced a decline in the revenue generated from €114 billion to €106 billion in the year 2009. However, in the year 2010, the group recovered well and improved its performance in the preceding years. This was also facilitated by the company’s decision to open more branches and increase sales in North America, Europe and also in the South American region. For this reason, the company increased its gross profits from around 16% to almost 19% in the year 2012 as shown in the graph below. In the year 2009, the company experienced much decline in the profits since most of the customers opted for purchasing passenger cars. Besides, the cost of production also increased by almost 88% in the financial year. However, in the preceding years which are 2010, 2011 and then 2012, the company employed the strategy of mixing the models so as to enhance the profits margins. Both the operating and the net profit margin had a positive improvement for the five years. The profit margin generated from the groups’ activities increased from 5.7% in the year 2008 to around 6.0% in the year 2012 (Thimm, A., 2013). Consequently, the company also increased its net profit margin from 4.2% in the year 2008 to 11.27% in the exercise 2012. The financial year 2009 majorly contributed to the decline in the profit margins for the year. In the fiscal years 2010 and 2011, the organization enhanced its operating and profit margins with the development of volumes and prices of the products produced. Also, the organization minimized the cost of producing the goods and ensured continuous optimization in the company’s processes and their cost structures. It is apparent that the operating profit for GM reduced to 6.0% in the year 2012. The company experienced problems in reducing the cost of production and also improving the volumes and prices. The good thing is that the business's net profit margin is much higher than the group's operating profits since the company has imposed high-interest income from its joint ventures also with other revenues. 2.2Liquidity The company’s quick ratio has declined from 0.90 in the financial year 2008 to 0.80 in the year 2012. Consequently, GM’s current ratio decreased significantly from 1.18 to 1.07. This decrease in both the current ratio and the quick ratio was contributed by the increment in the organization's current proportion of both the long-term debts and also the financial lease liabilities as shown below. The long-term debt and financial contract of GM have improved from €32million in the year 2008 to €56 billion in the year 2012. Consequently, the current liabilities of the organization have increased from €64 billion to around €107billion in the year 2012. Additionally, the current assets increased from €77 billion to over €115 billion in the year 2012 as depicted in Table 3. However, GM has endured a decrease in its quick and current ratio; the company has described strong liquidity flexibility. The company has different funding sources making it sustainable in the long term. 1.1 Earning Power The ROE for the company was determined with the help of the DuPont formula as seen in the figure above. The ROE for the organization increased from the 14.0% in the year 2008 to around 30.0% in 2012. The increase in the Return on Equity for the company was majorly due to the rise in the enterprise's profits. However, there was a decline in the operation efficiencies although the financial leverage improved significantly. This is depicted in the company’s asset turnover in the table below. GM’s ASSET TURNOVER TABLE 2.3leverage The automotive industry needs the high cost of expenditure especially in the equipment, machinery and also the plants departments. Also, there is a need for high development costs to ensure the quality of the future products (Thimm, A., 2013). The automotive industry provides General Motors to employ the following capital structure. The group declined its liabilities regarding its assets considering the unfavourable and high competition in the market. So as to counter the global meltdown, the levels of debt in the financial year 2009 rose. 2.4General Motors against the competitors General Motors poses high competition in the automotive industry to its major competitors who are Toyota, Volkswagen, and Ford. Also, the company is more profitable compared to its major competitors. When comparing the automate industry generally, there is an indication of increment regarding gross and the operating profit. General Motors targets to improve its profitability by including the Modular Transverse Toolkit in its business structure. Also, the GM’s good business performance is also depicted in the overall ROE, where the ROE is has been negatively affected by the reduced operating efficiency and also the high financial leverages influencing the organization negatively. Also, the company has a considerably high financial leverage when compared to its major competitors in the automotive industry which adversely affects the company’s ROE. However, the organization is doing well when it comes to the lower liquidity when compared to the other players in the industry. Generally, GM has a substantial liquidity and financial flexibility when compared to the other companies in the automotive industry. The performance of GM and other automotive companies 2.4strategy and the Growth model of General Motors The company is planning to invest more than €120 billion in R &D by the year 2018. This will make the firm the highest investor in Research and Development in the automotive industry. Accordingly, the company wishes to employ this investment so as to improve its current technologies as a way of improving the level of customer satisfaction. Also, there are the other main strategies which the company ought to employ. First, is to enhance the sales of the vehicles to a staggering figure of 13 million vehicles in a year. Secondly, the company intends to acquire an above average share of the upcoming markets such as in Asian continent. Thirdly, the company also targets to enhance the returns on sales to at minimum of 9% before taxation. This strategy will be used to ensure the business is sustainable in the long term even in the case of difficult market periods. Finally, the company intends to become the top employer in the automotive industry as a way of recruiting the first-class team of expertise in the automotive industry. Environmental commitment of GM Apart from anticipating a rise in demand for their products, the company is also committing to safeguard the environment from pollution especially from its branches. The Modular Toolkit Strategy The company is adopting this strategy to most of its brands as a way of leveraging the brand portfolios to full potential (Pellens, B., and Linnhoff, U., 2013). Thus, strategy has been widely employed mostly for best selling cars such as Chevrolet. There are various merits to this Modular Toolkit Strategy. The first advantage is that this strategy largely minimizes the cost of production. Secondly, it largely reduces the expenses incurred by investment and also development. Thirdly, it considers the economies of scale which is beneficial to the company. Finally, it is important in safeguarding the environment since it minimizes gas emission. However, there is a disadvantage with this strategy since it can tarnish the brand reputation in the long term periods especially in cases where the consumers’ perception is considered. A good example is the recall of more than two million cars which was done in China. This damaged the performance of the company since the recall cost the firm more than €440 million. 3.0Company Valuation 3.1the PE Multiple Valuation GM valuation based on Multiple Analyses in the Automotive Industry 3.2an analysis of the Dividend increment model valuation The model employed for determining the P/E multiple analysis, applied the determination of P/E, P/B and the P/S ratios especially for the main rivals of the company. The data collected depicts that the company has sales multiples of about 0.29, Earnings multiple of around 5.9 and then Book Value multiple of 1.77. When using this information to GM, it depicts a total valuation of around €87 billion which is more than the market capitalization of €77 billion as of the financial year 2012. It is apparent for that matter that the organization is being undervalued for around €10 billion. 3.4the Dividend Growth Model of General Motors Company 3.5a critical analysis of the Dividend increment Model valuation Dividend increment model is employed so to evaluate the organization. The evaluation is mostly based on a wider research so as to obtain numbers employed in the design. However, there are various assumptions which have been made while using the model. First, is that the WACC of the company stands at 5.14%? Secondly, there has been an annual growth of dividend by 3 % each year. Finally, the ordinary shares of the company are valued at €3.000 and the premium shares at €0.06 for the financial year 2012 (Thimm, A., 2013). This share price is considerably right especially for the preferred shareholders. Based on this information, GM is worth €70 billion. However from the market capitalization, the company is valued at €77billion as per the financial year ending 2012 (Pellens, B., and Linnhoff, U., 2013). This depicts clearly that the organization is over-valued by a staggering figure of €11 billion. 3.6Sensitivity Analysis From the sensitivity analysis, the worth of the company which is €66 billion is considerably sensitive to changes which may ensue in the WACC and also the dividend growth rate. This variation of values is essential in providing more depth and also high accuracy in determination of the final valuation of the company. 3.7the Rappaport Shareholders Value Analysis 3.7analysis of Rappaport SVA model of the company So as to value the organization accurately with the help of the Rappaport’s Shareholder Value Analysis there are various assumptions which were made. First, is that the company’s development in the future is divided into two periods which are; 2013-2017, 2017-2022 and then 2022-2028. This allows for high accuracy while evaluating the company. Secondly, the annual growth in revenue for the financial periods 2013-2017, 2017-2022 and 2022-2028 was 4%, 3%, and 5% respectively. This information is per the automotive industry. Thirdly, the company has an operating profit of around 7%. This figure was employed for the financial periods 2013-2017. However, it is below the three-year mean which 6.23% is. After the end of the fiscal year 2017, the company's operating profit is predicted to be enhanced by 6.5% since the company will be employing the modular toolkit strategy. The third assumption is that the tax rate for the organization stands at 21.40% without any deviations. This is calculated from the average of the five preceding years. Thirdly, the incremental rate of the investments in both the fixed and the working capitals of the company are expected to stand at 16.33% and 0.58% respectively without any deviations (Pellens, B., and Linnhoff, U., 2013). This information is based on the company's investment in the five preceding years. Finally, the WACC for the firm is valued at a figure of 5.14% at the end of the financial year ending at 31/12/2012. From these assumptions, the company can be valued at an Equity Value of around €96 billion with an estimated share price of €206.36 which is a right share price. With the market capitalization of around €77.5 billion in the financial year ending 2012, the SVA derived from the Rappaport depicts that the organization is undervalued by a staggering figure of €20billion. 3.8the Sensitivity Analysis of the Rappaport SVA Model A sensitivity analysis of this model clearly illustrates the effects of changing the models assumptions which affect the company's share price. (Francàs, S.L, et al. 2016) From the below table it is evident t that the price per share is considerably sensitive to changes especially in the GM’s growth and the Working Average Cost Capital. Also, the share price is not much sensitive especially to the varying rates of the investment mostly for the fixed assets and also for the working capital. 4.0conclusion General Motors is among the leading producer in the automotive industry globally. From the financial years 2008 to 2012 the company has had commendable growth. Its CAGR in the period was 15.86% from the fiscal year ending 2008 to 2012. This has been attributed to the development of more products such as the Wulang and Chevrolet. This has been beneficial to the company since it has enabled the company to develop an integrated automotive firm making it more competitive. Furthermore, the organization also improved its levels of profits making it firm its market position. By the financial year 2018, the General Motors targets to become continue being the leading car manufacturer. This will be possible by improving the operating efficiency of the company and also maintaining high levels of customer satisfactions. The wide range of the brands under the company’s portfolio will enable the firm to achieve its strategy (Baldi, S., and Borgman, H., 2001). Also this will widen the range of the consumers of their products since there will be a growing demand for more efficient, innovative products which are technology-integrated. Research and development are very vital in the growth strategy of the company according to Godfrey, K.R., (2016). This is depicted in the company's decision of investing €90 billion for the financial year 2018. This high investment in Research and Development with the employment of the modular transfer toolkits strategy in the company’s brand portfolio shows the organization will be sustainable in the long term thus continuing to outperform its competitors. Also, of this, the company has developed Chevrolet. Consequently, we believe that General Motors will offer an excellent investment opportunity in comparison to other firms in the automotive industry. However, it is very essential that the group does not underestimate the other competitors. The PE Multiple Valuation, Rappaport Shareholder Value analysis and also the Gordon’s Dividend Increment Model clearly depict that the company is currently undervalued by the automotive market. From market capitalization, the company is valued at a share price of €162.75 for the ordinary shares and €172.15 for the preference shares of the preferred shareholders (Leote, J.D.L., 2014). This results in an approximation value of €77.4 billion. However according to the Rappaport Model, the General Motors company should be valued at an Equity Value of around €105 billion which represents a share price of around €206.36. When including a 30% control premium, there is consideration of a maximum share price valuation at €268.27. 5.0BIBLIOGRAPHY Baldi, S. and Borgman, H., 2001. Consortium-Based B2B e-Marketplaces) A Case Study in the Automotive Industry. BLED 2001 Proceedings, p.12. Bohas, A., : The “Made in America” Label Hegemony A Globalization undermined by National Identities. Coispeau, O. and Luo, S., 2015. Mergers & Acquisitions and Partnerships in China (Vol. 4). World Scientific. Fischer, M., 2016. 14 Brand Valuation in Accordance with GAAP and Legal Requirements. Accountable Marketing: Linking Marketing Actions to Financial Performance, p.182. Francàs, S.L., Gómez, J.M., Grünwald, C. and Eppers, R., 2005. Benchmarking of Waste Management Software Based on a Process and Requirements Analysis–Case Study General Motors. Godfrey, K.R., 2016. Detecting the great short squeeze on General Motors Pacific-Basin Finance Journal. Leote, J.D.L., 2014. Equity research da General Motors(GM): business valuation and analysis of the implied strategy (Doctoral dissertation, Instituto Superior de Economia e Gestão). Lyytikäinen, I., 2016. How Is Credit Risk Estimated? Discussion and Evidence based on Cross-Industry Sample Utilizing the KMV Model. Madlani, J. and Ulvestad, J.C.A., 2012. Fundamental Valuation of the GM (Doctoral dissertation, Master Thesis, Copenhagen Business School). Pellens, B. and Linnhoff, U., 2013. 8 Financial analysis of group accounts in America: an empirical study. International Group Accounting (RLE Accounting): Issues in European Harmonization, p.110. Silva, S., 2013. Equity Valuation of the GM Group (Doctoral dissertation, Universidade Católica Portuguesa). Thimm, A., 2013. Assessing default risk of a public company: an empirical analysis on the basis of General Motors (Doctoral dissertation). Read More