Greenlight Capital’s long thesis for General Motors.

Also see

Greenlight Capital 2016 Letter: The Case For Caterpillar .

2016 Hedge Fund Letters

Introduction

  • Greenlight Capital is a value-oriented, research-driven investment management firm
    • Greenlight is a long-term holder of GM stock
    • We believe in GM’s prospects and the opportunity for long-term value creation
  • GM’s stock is not fairly valued today
    • Despite fundamentally strong operations, the stock trades at a significant discount to intrinsic value
    • The current P/E (price-to-earnings) multiple (5.6x) is the lowest in the S&P 500
    • The dividend yield (4.4%) is very high relative to the overall market and to GM’s conservative payout ratio (24%)
    • However, GM’s dividend is not respected by the market
    • GM’s investor base has a suboptimal combination of yield-oriented and value-focused shareholders with divergent investment objectives

Where Are We Today?

General Motors

Shareholders Are Still Awaiting Upside

General Motors

General Motors’ Valuation Conundrum

General Motors

Plan to Unlock Value

  • We believe there is a solution to unlock value that does not affect GM’s underlying operations or financial flexibility
    • GM should distribute, on a tax-free basis, a second class of common stock that we call the “Dividend Shares”
      • The Dividend Shares would be entitled to today’s dividend ($1.52 per year)
      • The Dividend Shares would trade separately from the existing common stock
    • The existing common stock (the “Capital Appreciation Shares”) would be entitled to the earnings in excess of dividends declared on the Dividend Shares, including all future growth

Creating two classes of common stock will unlock GM’s value by forcing the market to appropriately value the dividend and give credit for GM’s earnings potential

Our Proposed Solution: Creating Two Classes of Common Stock

General Motors

Allows investors to optimize their exposure to income and / or growth

Our Proposed Shares

General Motors

Valuing the Dividend Shares

  • We believe our solution will lead to GM being more fairly valued in the capital markets
    • The Dividend Shares will be attractive to yield-oriented investors
      • Our work indicates that they will trade with a 7% – 9% yield

General Motors

Valuing the Capital Appreciation Shares

  • The Capital Appreciation Shares will be attractive to value- and growth-focused investors
    • We believe they will be valued based on a P/E multiple, and we value them conservatively at the current depressed P/E multiple
    • But multiple expansion should occur because planned buybacks would buy more Capital Appreciation Shares than today’s common stock due to a reduced absolute share price
      • A more effective buyback will accelerate EPS growth, resulting in a higher P/E

General Motors

Valuing the Two Classes

  • The combined value of the Dividend Shares and the Capital Appreciation Shares leads to significant price appreciation compared to the current share price of $34.71(1)

General Motors

Our plan will deliver upside of 24% to 72%

Benefits

  • Our plan does not affect GM’s corporate strategy and will improve its financial flexibility
    • We are not advocating for any change to GM’s capital allocation policy, including capital devoted to balance sheet cash, dividends or share repurchases
    • We believe our solution will lower GM’s cost of capital and improve its access to capital
    • Simultaneously, our solution will enhance value for shareholders and attract new investors to GM’s common stock

Our plan will unlock between $13 billion and $38 billion of shareholder value through appropriate valuation of GM’s dividend and earnings potential

Expected Impact of Our Plan

General Motors

See the full PDF below.