Why Is Buffett Buying GM?

Interesting news for auto-watchers: Berkshire Hathaway (NYSE: BRK-A), the savvy conglomerate controlled by the great Warren Buffett, disclosed in an SEC filing on Thursday that it had bought 10 million shares of General Motors (NYSE: GM).

That comes on top of another 15 million shares of GM Berkshire bought earlier in 2012, bringing the total value of the company's investment in the General to nearly $700 million as of Thursday's close.

That's not chump change, even by Buffett's standards. What might Berkshire be thinking?

Is GM a value stock? The obvious guess for anyone who knows anything about Buffett's career is that he (or, more likely, Berkshire's new portfolio managers, Todd Combs and Ted Weschler) thinks that GM is undervalued at current price, particularly when viewed in the context of where the business is likely to go over the next several years

I happen to agree, which is why I own (somewhat less than 25 million shares of) GM stock myself. But it requires some explaining, because GM isn't really undervalued by the most basic traditional measures. Its current price-to-earnings ratio is around 10.4, roughly the long-term norm for auto stocks.

But it may well be undervalued after taking into account the huge amount of room for improvement available in GM's global operations -- and current management's determination to make those improvements and realize GM's full value.

Big gains await GM's Europe turnaround GM lost $1.8 billion in Europe last year and expects significant losses to continue for at least another year or two. The problems are a lot like those GM had in the U.S. a decade ago: too much production capacity, too-high costs, and declining sales -- in the case of Europe, because of a deep, protracted recession.

But GM CEO Dan Akerson has set in motion a major effort to overhaul GM's sick European operation. A new management team is in place, a factory has been closed, another has been sold, a cost-saving joint-venture with French automaker PSA Peugeot Citroen (NASDAQOTH: PEUGY) has been established, and a bunch of new products are coming.

GM CEO Dan Akerson reiterated on Thursday that he expects GM Europe to break even on a pre-tax basis by "mid-decade". Consider that GM made $6.19 billion in 2012. If GM had simply broken even in Europe last year, that number would have jumped to about $8 billion before taxes -- with no other changes or improvements to GM's global operations.

Improvements at home are already in motion Despite posting three profitable years in a row since its emergence from bankruptcy, GM is still very much a turnaround work in progress. It still has some catching up to do before it can match Ford (NYSE: F) or Toyota's (NYSE: TM) end-to-end product quality here in the U.S. -- or for that matter, Ford's profit margins here.

But what isn't visible to casual observers is that the work needed to narrow that gap is already happening. For the past three years, GM has been working on a full-on product overhaul that is just now hitting its stride. Products like the Chevy Cruze and Sonic small cars, and last year's Cadillac ATS sedan, have proven that GM can design and build vehicles that really do compete well with the world's best.

Over the next couple of years, GM will go from having North America's oldest product lineup to its newest, as a slew of all-new cars and trucks hit its dealers. If they're competitive – and GM's recent track record inspires some confidence – those new products should improve GM's average transaction prices, driving fatter margins.

The upshot: A lot of upside for GM The case for GM isn't quite as much of a slam-dunk as the case for Ford. Ford's North American operation is already robustly healthy, and the Blue Oval's proven management team is taking the same approach to restructuring its European operation, which has problems (and losses) similar to GM's.

GM still has more challenges at home than Ford does, and unlike Ford, its management team doesn't already have one impressive turnaround under its belt. But given GM's still-impressive global scale, the potential upside may be considerably higher. It's not hard to understand why Team Buffett chose to jump in.

It's true that decades of mismanagement of General Motors led to a painful bankruptcy in 2009, but it emerged a leaner, stronger company. GM's turnaround, however, is still a work in progress. Investors around the world are wondering if GM has what it takes to reclaim its former glory. I've put together a brand-new premium research report telling you exactly what you need to know about GM and its turnaround. If you own or are thinking about owning GM, then you don't want to miss this report. Click here now to get started.

Ya. You are probably right.

Will he not make the needed fixes to make the company solvent?

Problems with GM (IMHO):

1. Quality. GM have a serious problem with quality. Drove and will continue to drive customers away. No paying customers, no business.

2. Cost of operation. Apparently this was serious enough to drive the company into bankruptcy... before the government came to the rescue. Also, seems to be a risky investment since the stock holders got screwed at the hands of the Feds last time.

GM seems to be huge sink hole without any serious fixes and reorganization. Unless the Feds are willing to guarantee solvency on the backs of taxpayers.

They spent the TARP funds on their debt to the Feds and then claimed that they paid the loan back.

Confused?

Simplified: GM used the money from the Fed TARP program to pay back the Fed bailout loan and claimed it good. Lol.

What a scam!

Contrary to popular perception, Warren Buffett and Berkshire-Hathaway do not alway buy value and hold it forever. They do that when they can buy out entire companies, but they can and do sell their holdings periodically. Buffett and BH are also, in my own opinion, not at all above riding a PC wave when profitable or even furthering certain political objectives via targeted investments.

One need only look at the once fairly impressive holdings of FNM to get something of a glimpse of their thinking in buying GM. Perception of a government backstop? Yep. Something of a political agenda to support? Yep. Fannie Mae was quite a ride for clued in investors due to several legal and regulatory changes that led to a boom.

But, they sold. It wasn’t a forever holding at all.

Look, brother, I’m all for supporting America. Good on ya for supporting it too. But you need to look at things a little closer.

Supporting GM is supporting Obama and his fascist takeover of GM and Chrysler. Supporting Obama and GM is supporting the unions...the reason WHY Obama took over GM & C.

Opposing Obama and Buffett and the unions IS supporting America. I don’t NEED to support America, I AM supporting America. Suggest you join in.

That may be, but there is a limited number of American car plants left, and I say it is time to support American manufacturing.

Period.

Support American jobs. Not German jobs. Not Japanese jobs. Not Korean or Indian or Chinese jobs.

American jobs.

Ford has the best trucks on the market, but you see lots Chevy trucks on the road (as well as Toyota and Ford) with over 300K miles on them. If I was considering a Chevy pickup before the bailout, I sure as hell wouldn’t be now.

I can do both...support American car manufacturing (Ford) and not support Obama. You choose GM and Obama. America loses.

Please turn in your Freeper Card at the front desk as you leave.

No way Jose!

I may not be in lockstep with 100% of Freepers on some things about trade.

In fact I’m pretty sure I am not.

But I’ll be darned if I will walk away from the best darn site on the entire internet.

Bar none.

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