How GM Could Spin Off a $400 Billion Business

NEW YORK (TheStreet) -- I feel for General Motors (GM) in this recall mess. Thanks to an overzealous legal system, in which the tiniest mistake gets punished by draconian lawsuits, GM is now recalling almost every single car ever made, in many cases for the flimsiest of reasons.

In the spirit of providing some cheer for the GM's beleaguered management team, I have a proposal for how GM could spin out one of its factories for a market cap of $400 billion, basically almost eight times its current $50-something billion market cap. Follow me on this one!

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I got the idea from an article over the weekend, published in Dallas Morning News, which had a report from GM's large SUV factory. It's about the factory that produces GM's large SUVs with nameplates such as Tahoe, Suburban, Yukon and Escalade. A new model series just went into production in early 2014.

Here are the characteristics of this GM business unit, located in Texas:

-- 1,200 vehicles are produced per day, six days a week, sometimes seven days a week.

-- The factory is running at least 24x6 for 144 hours per week.

-- That's basically approaching 400,000 vehicles per year.

-- Yukon model sales growth was 136% in April and 42% in May.

-- Days on dealer lots are among the shortest of any car in the market today -- 10 days for Suburban and 17 days for Tahoe.

-- Most popular model starts at $63,000. A typical transaction price could be over $70,000.

Think about these numbers for a moment. A factory producing cars at essentially 100% capacity, sales growing deep into the double digit percentages, near-zero inventories.

Sounds like Tesla (TSLA), doesn't it?

The first difference is that this factory produces approximately 10 times as many vehicles as Tesla does. The second difference is that this is a very profitable vehicle to manufacture.

GM's factory outside Dallas is basically like Tesla, except ten times larger and profitable. Let's apply some Tesla multiples to see how much this business would be worth if GM spun it off.

Let's start with market cap per vehicle sold. This year, Tesla is expected to ship 35,000 cars. The fully diluted market cap is not too far from $35 billion. So that's $1 million per car sold.

Applying that multiple to GM's Arlington, Texas, factory, we get a market cap of close to $400 billion. Not bad, considering GM's entire market cap today is not dramatically above $50 billion.

In terms of price-to-sales, let's assume that GM's daily revenue from this factory is $84 million (1,200 vehicles multiplied by $70,000). At only six days per week, that's $504 million per week. Multiply by 50 weeks and you have $25 billion per year.

That is approximately 10 times Tesla's current revenue. Given that Tesla's fully diluted market cap is approximately $35 billion, that would imply a market value of this GM business unit of $350 billion.

However, GM is profitable and Tesla is not. This business unit is widely viewed as one of GMs most profitable business units, perhaps the most profitable. That surely should bump up the value in a comparison, taking it from $350 billion to at least $400 billion.

In terms of business potential, GM's Texas factory has at least two potential sources of upside that Tesla does not:

1. International expansion:

Tesla has already started milking the international markets. It is expected that at least approximately 50% of Tesla's sales in 2014 will be from non-U.S. countries, as U.S. sales has stalled to be approximately flat, perhaps down a bit compared to 2013.

One of these days, GM might want to put some effort in spreading the goodness of American society to the upwardly mobile peasants around the world. This means selling not only cowboy hats, but also Suburbans, Tahoes, Yukons and Escalades to go along.

Thing is, to use Tesla's lovely "we're capacity constrained" phrase, GM just doesn't have the time or the capacity to expand internationally right now. It's running overtime at 100% capacity. Once North American demand starts to flatten out, GM could consider bestowing the honor of large SUV ownership upon the peoples of the world.

2. Electrification:

GM hasn't even made a single plug-in electric SUV yet. Yes, I know, they made a mild non-plug-in hybrid for a few years, but it didn't sell well. The demand was relatively tiny and the cost to produce the product was disproportionately high.

This will change in the future. GM has outstanding drivetrains in both the Chevrolet Volt and the Chevrolet Spark. One way or another, we will be seeing some form of plug-in variants in a large future GM SUV.

It probably won't happen until 2016 at the earliest, and more likely in 2017 or 2018, but it will likely happen eventually. Once battery prices have been reduced, it will be a corner of the market with sufficiently large volume to justify the investment. They are probably working on it right now, in terms of R&D. I say a 2017 introduction and 2018 volume production. GM already has almost three times as many electric vehicle patents as Tesla does.

In other words, it is not just about the current growth rate that is competitive with Tesla's, but also the future expansion opportunities. GM's cash flows can finance factory expansions without having to issue new debt and convertible instruments.

To GM's management, I say: Don't despair. You may be distracted by all of these recalls but it's not really a big deal. You have bigger fish to fry.

Hire an investment banker and spin off your large SUV business. It's approximately 10 times as large as Tesla, works at 100% capacity 24 hours a day and is seeing a staggering growth rate even without yet tapping two major growth markets -- electrified variants and overseas geographies.

If GM just put forth a side-by-side comparison with Tesla, it could argue that the Arlington, Texas, factory is worth on the order of $400 billion. It would be the biggest spinoff in corporate world history. All based on Tesla's current market cap and multiple metrics.

A giant leap forward, from and above GM's current $58 billion market cap. Mary Barra, this is your chance to create more shareholder wealth than Steve Jobs.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates GENERAL MOTORS CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate GENERAL MOTORS CO (GM) a BUY. This is driven by some important positives, 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 20.9%. 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 40.62%.
  • 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 ($3.13 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.

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