OMAHA, Neb. (TheStreet) -- Given that Berkshire Hathaway (BRK.A - Get Report) owns 30 million shares of GM (GM - Get Report), which is nearly 2% of the company, CEO Warren Buffett might be expected to buy a GM car.
But Buffett's recent purchase of a Cadillac XTS was not just a case of an investor showing loyalty to his investment decision-making. Rather, the purchase demonstrated the value of listening to employees and the importance of the automotive sales force.
It also continues the narrative that GM may face ignition switch problems, air bag defects, compensation claims, regulatory issues and increased Congressional scrutiny, but consumers have apparently shut that out and continue to buy new GM vehicles.
On the negative side, given that Buffett is 83, the story reinforced the reality of Cadillac's older demographic. But overall, it can't hurt when the world's most famous value investor invests in your car.
GM publicly released the Buffett story late Tuesday, in the midst of more negative publicity as The New York Times reported that it hid information from regulators and CEO Mary Barra prepared for one more Congressional grilling on Thursday. The Buffett story continues the narrative that GM's sordid safety practices occurred in the past, but aren't particularly troubling to buyers of new GM cars.
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In early morning trading Wednesday, GM shares were up 16 cents to $37.74. Year to date, shares are down about 8%.
According to the automaker, Madison Willers, a saleswoman at Huber Cadillac in Omaha, Neb., recently greeted a woman who said she was shipping for a friend. Unbeknownst to Willers, the mystery shopper was Susie Buffett, Warren Buffett's daughter.
Susie Buffett's intent was to purchase a new CTS sports sedan. But Willers convinced her to buy an XTS luxury sedan instead. "My job is to show and tell, and to provide our customers with the Cadillac that best meets their needs," Willers said, in a prepared statement.
Unknowingly, Willers was going over her boss's head. It turned out that GM CEO Mary Barra had recommended the XTS to Buffett.
But Buffett smoothed things over in a May 21 letter to Barra, in which he praised Willers, saying "Madison could not have been more helpful.
"My daughter said her dad's 'car guy friend' (that's you) said he should buy a CTS, but Madison said the XTS would be more appropriate," Buffett wrote to Barra.
"I think this reflects an evaluation on her part on her part that from Susie's description I must be hopelessly over-the-hill (a unanimous view among my family," he said.
Of course, the purchase shows confidence in GM. It also refutes the suggestion last week that Buffett, who was photographed sitting in a Subaru Outback, had gone over to the other side. That story was big in the social media world of blogs, tweets, and Facebook posts, and was viewed by some as an indication that the wise Buffett was going with the utilitarian vehicle.
On the negative side, Cadillac is trying to shed its image as a car for old people. According to a recent report by IHS Automotive, the average age of a Cadillac buyer in 2013 was 59.5, third among major brands. The average Ford (F) Lincoln buyer was 61 and the average Buick buyer was 60.3, while the average U.S. new car buyer was 51.8.
"We rate GENERAL MOTORS CO (GM) a BUY. This is driven by multiple strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations, largely solid financial position with reasonable debt levels by most measures and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had sub par growth in net income."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GM's revenue growth trails the industry average of 21.9%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Net operating cash flow has significantly increased by 141.26% to $1,976.00 million when compared to the same quarter last year. In addition, GENERAL MOTORS CO has also vastly surpassed the industry average cash flow growth rate of 41.88%.
- The debt-to-equity ratio is somewhat low, currently at 0.89, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.81 is somewhat weak and could be cause for future problems.
- GENERAL MOTORS CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, GENERAL MOTORS CO reported lower earnings of $2.35 versus $2.93 in the prior year. This year, the market expects an improvement in earnings ($3.14 versus $2.35).
- Compared to where it was 12 months ago, the stock is up, but it has so far lagged the appreciation in the S&P 500. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.
- You can view the full analysis from the report here: GM Ratings Report