How Valuable Is GM’s Passenger Cars Business In the U.S.?
General Motors (NASDAQ: GM) reports revenue for its automotive divisions operating in the geographies North America, Europe, South America and all other international operations. With certain assumptions, it is possible to value GM’s operations in important geographies, such as GM’s passenger car business in the U.S.
The three key assumptions required to arrive at a value for this business segment are as follows:
1) We assumed that the revenue and cost of sales and inventory for GM’s Cars business in the U.S., GM’s Trucks business in the U.S. and GM’s business in Canada & Mexico are proportional to the number of units sold by the auto maker in each of these segments. The revenue figure allows us to calculate the average revenue earned per vehicle in each of these segments. By forecasting GM’s market share in each segment going forward, we can forecast GM’s revenue and gross profits for each of these segments.
2) We allocated all indirect expenses — Selling, General and Administrative Expenses, Research and Development Expenses, Interest Expenses, Tax Expenses, Capital Expenditure and changes in net working capital and net operating assets — in proportion to the share of gross profit for each division. We can thus project the expected cash profits for each division.
3) We assumed a terminal growth rate for these cash flows and a discount rate (10%) to arrive at a net present value for these future cash flows.
Based on this analysis, we value GM’s passenger car business at $2.3 billion, amounting to 3.6% of our overall valuation for the U.S. based auto maker.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors
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