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Long General Motors GM : Remains an "ugly duckling" due to long investor memories, government ownership overhang and weak Europe division. Bull case: Fixed cost structure improved. Pension risks overblown, unfunded liability may have narrowed by several billion, rising interest rates would help, too. No required pension contributions until at least Balance sheet cleaned up, brand quality improving across the board, improving pricing. Consensus is too low, SAAR may be higher than street.
GM is 1 in China and growing faster than industry. Europe is a problem and should restructure to at least break even by Government stake is an opportunity, not an overhang. US demand is 16M units: Scrap is Ave age is now 11 years, up from 9 a decade ago. Population growth alone is 2M units of annual demand. Recessions cause less vehicles per driver, but it rebounds as economy does.
What should it do with its cash? Government has 50M shares. If Obama is re-elected, he may be willing to sell at a loss. Otherwise, they could still do a large open market buyback instead. This is midcycle, not peak result, so deserves a better multiple. Long Cigna CI : Lots of work. Then you have to understand their non-HMO businesses.
Investors don't like HMOs now. Earnings are hard to predict from Q to Q. Obamacare scares investors. Obamacare: capped profits, risk of financial penalties Bull case: Secular growth, high barriers to entry, big players have scale already. Still, ROE has been strong over time. CI is the best performer in the group. They reprice annually so they always make money. Obamacare is just "a homework problem" that can be analyzed.
PBM is a potential high multiple sale GDL segment is consistent source of earnings despite weak employment trends. International is for multinational corporations' employees living overseas. Trades at 7. You can see further comments from Einhorn on Cigna in Greenlight's Q2 letter. Average sector multiple is 22x. Restaurant business: low barriers to entry, Obamacare brings additional costs since they don't currently provide health care for employees, summer drought affects costs in coming periods.
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