General Motors Bond and Stock Analysis PDF

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General Motors Bond and Stock Analysis NYSE:GM Research Project Part 2 FIN 330 Section 7386 Keith Crook, James Reddy, Lauren Downing, and Dakota Eaton May 4th, 2021

Introduction One way to determine a company’s health and risk level is by looking at a company’s financial ratios and the status of its stocks and bonds. Companies use risk of finances, stocks, and bonds to leverage growth for their organization and investors to buy shares in their company. The bigger the risk the higher the reward if the company succeeds. Although you can gain insight from data on the income statement, balance sheet, or stock market it is important to understand how these all work together. Investors like to make smart decisions and organizations like to survive against a very competitive market. By looking at the data collected in this report an investor will be able to use it to understand the risk associated with General Motors Co (also identified as GM in this analysis) and their level of strength in the publicly traded market. Financial Leverage Ratios Financial ratios allow investors and competing organizations evaluate the financial statements of publicly traded firms. GM is a publicly traded firm which investors pay close attention to the financial health of this and competing organizations alike. One of the ways to evaluate the debt of an organization is to look at the Debt-to-Equity (D/E) ratio. The D/E ratio shows how much a debt a company has against its equity. If a company had a .50 D/E ratio the company would have $.50 of debt for every $1.00 in equity. One of the most famous investors, Warren Buffet, prefers to buy companies with a D/E ratio less than .50 (Preston Pysh, 2012). As we can see from the chart below GM has over a dollar of debt to every dollar of equity, which for a conservative investor may seem risky (MacroTrends, 2021). Another ratio that we will look at is the Times Interest Earned (TIE) ratio which takes the operating income and divides that by the interest expense. This shows an investor how well the company would be able to pay back its interest expense. The higher the Times Interest Earned ratio is the better the position it is in to 2

pay the expense, and although GM has a smaller ratio from 2017 to 2020, it is still in good shape to pay back its interest expense. One of the last ratios within the financial leverage ratio category is the Debt to Asset ratio which shows how much of a company’s debts are funded by assets. A company with a ratio of more than 1 shows that it has more liabilities than assets and may be at risk if interest rates were to rise. Companies with less than a D/A ratio of 1 like GM shows, will have more equity funding their assets then debt. With GM remaining at a D/A ratio of less than 1 and a TIE ratio over 5 an investor could feel secure with putting their money into GM shares (Yahoo Finance, n.d). Although the company has a D/E ratio over 1, it is still a manageable level of risk for investors at any stage.

Chart 1

Bond Performance General Motors CO. Bonds (Prices as of 05/03/2021)

Symbol GM498567

Maturity 10/01/202

Coupon 6.800%

Price 125.85

Yield 2.356%

GM498567

10/2/2023

5.400%

110.58

.866%

GM498567 3 Table 1

10/1/2025

6.125%

118.49

1.621%

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7

1

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If we analyze the data in the chart above, we see the last price for three different General Motors Company bonds. Assuming that the par value of each of the three bonds is $1,000, a buyer would have to pay the following if they wished to purchase a bond at the price listed. 1. Bond GM4986754: (1000/100)*125.85 = 1,258.50 (FINRA, 2021) Bond GM4985671 (1000/100)*110.58 = 1,105.80 (FINRA, 2021) Bond GM4985673 (1000/100)*118.49 = 1,184.90 (FINRA, 2021) Next, we will calculate the annual coupon interest payment for each of the bonds listed above by multiplying the Coupon Rate by the Par value in order to get the coupon interest payment. 2. Bond GM4986754: Coupon Rate: 6.800% Par Value: $1,000 Coupon Payment = 6.800%*1000 = $68.00 (FINRA, 2021) Bond GM4985671 Coupon Rate: 5.400% Par Value: $1,000 Coupon Rate = 5.4%*1000 = $54.00 (FINRA, 2021) Bond GM4985673 Coupon Rate: 6.125% Par Value: $1,000 Coupon Rate = 6.125%*1000 = $61.25 (FINRA, 2021)

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Next, we will calculate the current yield of the bond by dividing the annual coupon payment by the current market price of the bond. 3. Bond Yield = Annual Coupon Payment / Current Market Price Bond GM4986754 68/125.85 = 54.03% (FINRA, 2021) Bond GM4985671 54/110.58 = 48.83% (FINRA, 2021) Bond GM4985673 61.25/118.49 = 51.69% (FINRA, 2021) 4. YTM’s for each of the bonds are listed above in the chart (Table 1.) 5. Based off the data that has been presented for each of the three bonds issued by General Motors CO Bond GM4985673 or Bond GM4985674 would be the best bond to purchase if required to choose from the three available bonds. The reason for picking these two bonds is attributed to the fact that they have high coupon rates which lowers the risk of a higher interest rate. These bonds also have YTM that would be considered low risk. All three of these bonds are callable which means the issuer could redeem these bonds prior to the maturity date (Finra, 2021). An investor considering purchasing bonds would benefit from the purchase of these two bonds based on the data provided in this analysis and the future plans of the company (Trainer, 2021). The reason for this is based off of GM having a great year in 2020 and having a current ratio of 1.01 which means they are able to cover all of their debts (MarketWatch, 2021). Net

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Profit Margin has trended positively for GM from 2018 to 2020 and should continue to increase since the loss in 2017 due to new tax laws (Naughton, 2017).

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Market Ratios and Stock Performance General Motors Co (GM) 2019 2018 5.96 35.59

2020 Price/Earnings 18.67 Ratio 1.35 1.15 1.23 Market/Book Ratio (or Price/Book Ratio) Earnings per $4.33 $4.57 $5.53 Share $0.38 $1.52 $1.52 Dividends per Share Table 2 2018 – 2020 Morningstar, General Motors Co and Ford Motor Co

Ford Motor Co (F) 2020 0.27 1.09

$ -0.32 $0.15

Market ratios allow potential investors to analyze the cost of a company’s stock relative to others or the industry average. It is a way to determine whether a stock is “cheap”, “expensive”, or priced appropriately. The table above provides multiple ratios for consideration of GM and its competitor Ford Motor Co. One of the ratios used in this type of analysis is the price/earnings ratio which determines how much is paid for a stock relative to how much the company is earning. For 2020, GM has a price/earnings ratio of 18.67 (GM Valuation, Morningstar, 2021). This is up from 2019, but down from 2018 when it was as high as 35.59. In comparison, Ford Motor Co, had a price/earnings ratio of 0.27 in 2020. Considering this ratio alone, GM’s stock appears to be more expensive than Ford’s stock. To value the stocks further, the market/book ratio can be considered. This ratio attempts to value the company’s stock based on its accounting value. In 2020, GM had a market/book value of 1.35 while Home Depot had a value at 1.09. Based upon the market/book ratio for each company, their respective market prices seem fairly priced in comparison to their book values. GM’s earnings per share was $4.33 in 2020, a slight drop from where it stood in 2018. Still, GM exceeds Ford in this area, as Ford 7

realized $-0.32 earnings per share in 2020. The last ratio included in the table above is dividends per share. This ratio provides information regarding the amount of dividends paid in relation to the company’s shares. For 2018 and 2019, GM had dividends per share value of $1.52. In 2020, it dropped to just $0.38. Ford, on the other hand, had dividends per share of just $0.15 in 2020. Based on the previous analysis of GM’s market ratios over the past three years (as presented in the table), it does not appear that for 2020 common stockholders received an adequate return on their investment. The 5-year average price/earnings ratio for GM is 18.0 (Morningside, GM, 2021). Based on this average, the 2020 price/earnings ratio seems appropriate at 18.67. The market/book price increased slightly, but stayed fairly close to 1 which means that the stock is properly valued. On the other hand, earnings per share declined, and dividends per share decreased dramatically, under $1.00. These changes could be a result of the global pandemic which impacted the better part of 2020’s economy. Investors may consider waiting to invest in GM until more information is available regarding any lasting effects of the pandemic on the company.

Graph 2 Morningstar 2021, Historical Stock Prices for General Motor Co and Ford Motor Co

The graph presented above provides end of month closing stock prices for 2020 for GM and Ford. GM has experienced a series of fluctuations in its stock price over the 12 month period. The price has fallen as low as right above $20 and as high as approximately $44. Ford’s stock price has remained between $4- 9 during the 12 month period. The graph highlights how 8

the lowest points of each company’s stock prices aligns with the beginning stages of the pandemic which occurred in March 2020. By the end of 2020, GM’s stock price had risen above its stock price at the beginning of the year. Ford’s stock price, on the other hand seems to have trailed only slightly from its starting point, and ends up back there by the end of the year. Based on the fluctuations of GM’s stock price over the past year, and the fact that the dividends per share have declined, a potential investor may want to hold off on purchasing common stock of the company. The price of the stock is increasing, while dividends are decreasing. On the other hand, potential investors willing to take the risk that the market ratio values from 2020 are solely a result of the pandemic and not an indication of the future, may consider investing based on the following: the price/earnings ratio aligns with the company’s five year average and the market/book price appears to be properly valued, even though it has slightly increased. Still, there is much uncertainty with the economy as the pandemic continues, and many investors may choose certainty over risky investing. General Motors Specific Recommendation Much like any other automotive company, the COVID-19 pandemic sunk sales. This made it hard for most companies to maintain their financial leverage and stand strong against their competition. Since people were not in the market for buying cars since they could not go out General Motors used other methods to keep their financial leverage. Before the vaccine, General Motors decided they would suspend their dividends payments in quarter two of 2020 to ensure they are lowering the debt. If they had continued to pay a dividend of .38 cents like they did since 2017, they would not have been able to balance the scale as easily (Nasdaq, n.d.). This was a smart financial decision by General Motors management team that is currently still active, which luckily benefited General Motors. By the end of Q4 2020, General Motors had around $17

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billion in automotive debt and a total debt of $110 billion (GM Cruise Origin, 2021). The current total debt is one of the companies highest records. Yet, GM managed to bring their automotive debt down from $34 billion in Q2 2020 to $17 billion in Q4 2020 (GM Cruise Origin, 2021). GM should continue to bring down their debt in their automotive department, while remaining to use their debts effectively. If they do not find a solution quickly, GM has a high risk of their revenue continuing to plumet while their debt skyrockets. GM will find that their TTM revenue will decline causing them to reach a new low point making it harder to recover. General Motors dipped their toes in the electric automotive market with their Chevrolet Volt car in 2010. With the increase in sales from the one vehicle, they decided to go further and invested millions into making electronic cars. With gas prices going up every day with Biden in office, many people are looking for electric vehicles. One vehicle in particular that has many people interested in General Motors is the electric Hummer. By picking models that were in high demand at one point and remodeling it to be state of the art, General Motors should see a significant increase in sales over the next few years. By taking the time to invest in the electric vehicles market, General Motors positions themselves higher than their competitor Ford. If General Motors continues to invest in electric/autonomous vehicles, they should see an increase in sales which will also help lower their debt. It is a win-win all around since customers will be happy and management will be able to breath and hopefully begin to pay dividends again. Reflection By reviewing a company like General Motors stocks and bonds, investors as well as future investors now have the knowledge to make a sound decision when investing. While analyzing General Motors, one would notice that there are several different bonds that can be invested in. With the knowledge from the project, future investors will be able to review a bond 10

of any company to see if the return is worth the investment. If an investor does not take the time to learn the numbers and what they stand for such as the P/E ratio (13.23 for General Motors), an investor may find themselves taking a loss. It could be considered a gamble to invest in a company without knowing about their assets, revenue, debt, etc. However, if an investor knew about the meaning of the numbers, they would be able to notice General Motors is not a terrible investment. While there might be other better investments out on the market, General Motors is a safe bet when it comes to the automotive industry. Knowing the difference between a good and bad investment could either lead to retiring early, or taking major losses that can be detrimental.

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References FINRA (2021). General MTRS CO (Bond GM4985674). FINRA. Retrieved from http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C902141&symbol=GM498 5674 FINRA (2021). General MTRS CO (Bond GM4985673). FINRA. Retrieved from http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C902139&symbol=GM498 5673 FINRA (2021). General MTRS CO (Bond GM4985671). FINRA. Retrieved from http://finramarkets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C902137&symbol=GM4985671 MacroTrends. (2021). General motors debt to equity ratio 2009-2020 GM. Retrieved May 1, 2021 from https://www.macrotrends.net/stocks/charts/GM/general-motors/debt-equity-ratio MarketWatch (2021). General Motors. MarketWatch. Retrieved from https://www.marketwatch.com/investing/stock/gm/financials/balance-sheet Morningstar (2021). General Motors CO(GM). Retrieved from https://www.morningstar.com/stocks/xnys/gm/valuation.

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Morningstar (2021). General Motors CO(GM). Retrieved from https://www.morningstar.com/stocks/xnys/gm/dividends Morningstar (2021). General Motors CO(GM). Retrieved from http://financials.morningstar.com/ratios/r.html?t=GM®ion=usa&culture=en-US Morningstar (2021). General Motors CO(GM). Retrieved from https://financials.morningstar.com/ratios/r.html?t=0P0000029A&culture=en&platform=sal Morningstar (2021). Ford Motor Co (F). Retrieved from https://www.morningstar.com/stocks/xnys/f/valuation Morningstar (2021). Ford Motor Co (F). Retrieved from https://www.morningstar.com/stocks/xnys/f/dividends Morningstar (2021). General Motors CO(GM). Retrieved from http://financials.morningstar.com/valuation/price-ratio.html?t=GM®ion=usa&culture=en-US. Morningstar (2021). General Motors CO(GM). Retrieved from http://performance.morningstar.com/stock/performance-return.action? p=price_history_page&t=GM®ion=usa&culture=en-US. Morningstar (2021). Ford Motor Co (F). Retrieved from http://performance.morningstar.com/stock/performance-return.action? p=price_history_page&t=F®ion=usa&culture=en-US. Preston Pysh. (2012, May17). 18. Warren buffett’s 1st rule – what is the current ratio and the debt to equity ratio. YouTube [video file]. Retrieved May 1, 2021 from https://www.youtube.com/watch? v=2ngO4jtyGlk&list=UULTdCY-fNXc1GqzIuflK-OQ

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Naughton, N. (2017). GM posts strong 2017 despite loss. The Detroit News. Retrieved from https://www.detroitnews.com/story/business/autos/general-motors/2018/02/06/gm-annualearnings/110146218/ Trainer, D. (2021). General Motors Is Worth the Wait. Forbes. Retrieved from https://www.forbes.com/sites/greatspeculations/2021/03/02/general-motors-is-worth-the-wait/? sh=3ccd931290a8 Yahoo Finance. (n.d.). General motors company (gm). Retrieved May 1, 2021 from https://finance.yahoo.com/quote/GM/balance-sheet?p=GM Nasdaq. (n.d.). General Motors Company Common Stock. GM Dividend History. Retrieved May 3rd, 2021 from https://www.nasdaq.com/market-activity/stocks/gm/dividend-history Gm Cruise Origin. (2021, February 24). How Much Debt Does GM Have? Retrieved May 3rd, 2021 from https://stockdividendscreener.com/auto-manufacturers/gm-total-debt-and-liabilities/

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