Credit and equity often seem like different dimensions in the analytical universe, but they often intersect in compelling ways. Take General Motors (GM) and its plan to issue equity for example.
There’s a case to be made for GM’s having a lot of equity value. To make it, we also have to look at Ford.
For both companies, 2009 was a big improvement over 2008. But Ford did better, generating $11.0 billion in EBITDA, while GM had an EBITDA loss of $9.9 billion. And Ford has publicly traded common shares and an equity market value of about $42 billion, while GM has neither.
Let’s make two simplifying assumptions. One is that, in the absence of forecasts, we can use last year’s financials to value Ford and GM. The other is that over time GM’s performance will match Ford’s.
Ford’s enterprise value is the sum of its equity market value, minority interest, and debt net of cash: $84.9 billion. Its value multiple is its enterprise value divided by EBITDA: 7.7x. Its EBITDA margin is EBITDA divided by sales: 9.3%.
If we apply the same margin to GM’s 2009 revenues, we get an estimate of its longer-term earning power: $9.7 billion in EBITDA. If we apply the same multiple to GM, we get its enterprise value: $75.1 billion.
GM’s equity value is its enterprise value less minority interest and debt net of cash: $82.1 billion. GM’s equity value is higher than its enterprise value because GM’s cash reserves exceed its debt. But that includes only the debt GM carries on its balance sheet.
GM has $37.0 billion in unfunded benefit obligations that are not classified as debt. Credit analysts see them as equivalent to debt and include them in their leverage analysis.
If we bring them into our analysis of GM’s equity value, it falls to $45.1 billion. That makes a big dent in GM’s potential equity value.
In this case, the same factors that drive credit risk drive equity value. And a tool that’s long been in credit analysts’ kits proves useful over on the equity side of the financial space-time continuum.
