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General Motors Company (NYSE: GM)April 2nd, 2013
0
Presented by:Meghan C., Mak D., Zeeshan M.
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Outline
1
1. Company Description
2. Investment Thesis
3. Industry Outlook
4. Company Outlook
5. Risks and Catalysts
6. Valuation
7. Recommendation
8. Appendix
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COMPANY DESCRIPTION
General Motors
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Company Profile
3
General Motors Company designs, builds,
and sells cars, trucks, and automobile parts
worldwide, through a network of
independent authorized retailers.
The company also provides automotive
financing services through General MotorsFinancial Company, Inc. (GM Financial).
GM Financial offers financing to consumers
who are unable to obtain financing from
traditional sources.
The operations are divided in four
automotive segments: GM North America
(GMNA), GM Europe (GME), GMInternational Operations (GMIO), and GM
South America (GMSA).
Mar. 20, 2013: GM preventively recalls
34,000 Buick and Cadillac vehicles.
Dec. 19, 2012: General Motors to buy-back
remaining stake from Treasury.
Nov. 28, 2012: GM, SAIC and Wuling to
build $1 billion plant in Chongqing, China.
Oct. 5, 2012: Fiat to relaunch talks with GM
on Opel acquisition.
Aug. 26, 2012: GM to cut 30% of Opel jobs
in Germany.
Jun. 13, 2012: Opel to shut down Bochumplant by 2016.
COMPANY DESCRIPTION RECENT NEWS
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Auto bailout
4
Bailout
In December 2008, the Federal government used $13.4 billion of the $700 billion TARP
bailout fund to rescue General Motors and Chrysler from immediate bankruptcy.
Many opposed the bailout, saying US automakers brought their near-bankruptcy on
themselves by lack of innovation and poor positioning in the energy efficient era, reducing
their competitiveness on a global level.
Ford was in a better shape because it had already mortgaged its assets in 2006 to raise $24.5
billion. Nonetheless, its competition probably got the upper hand thanks to the government
bailout.
Bankruptcy
On June 1st, 2009, GM filed for Chapter 11 bankruptcy, the fourth largest filing in US
history. Consequently, it sold Hummer, Saturn, Saab, and other assets in attempts to
restructure. The stock was removed from the DJIA and S&P 500.
The US Treasury and the Canadian government financed a new company to purchase the
operating assets of the old GM company in bankruptcy proceedings.
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Key Statistics
5
GMNA58%GME
14%
GMIO17%
GMSA10%
GMF1%
Revenue by segment
6953
-17972191
271744
8362
GMNA GME GMIO GMSA GMF Total
EBIT contribution
Share Price $28.22
Shares outstanding 1.37B
Market cap. $38.56B
Beta 1.69
P/E ratio 9.70x
Forward P/E 8.21x
Dividend yield 0%
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Trading Performance
6
50
60
70
80
90
100
110
120
11/17/2010 3/17/2011 7/17/2011 11/17/2011 3/17/2012 7/17/2012 11/17/2012 3/17/2013
GM Dow Jones Auto Index Ford
GM 83.6
DJI Auto 87.5
F 78.7
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INVESTMENT THESIS
General Motors
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Investment Thesis
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Competitive Positioning New GM releases in past 2 years caught up to competition.
Growth is Driven off of Pent-Up Demand in the U.S
Industry data (average age of cars) favors a pick-up in trucks (13.0 vs. 11.0) where the average transaction
price and margins are higher than passenger cars.
Attractive valuation
GM trades at 8.2x 2013 EPS which is cheap relative to European OEMs trading at 7.91x 2013 EPS and
given the attractive growth prospects for the automotive industry the multiple should trade higher
Our DCF model suggests a $35.95 price-target which implies a 10% 5-year average growth in EPS, which
is not aggressive given that EPS growth will come from increased vehicle sales, upside pricing (mix shift
and new product launches) and lastly cost saving.
We have a 2013 year end price target of $35.00 (25% upside) applying a 10x PE multiple to our $3.50
EPS target.
Where we differ from consensus
USA: Higher than consensus in the short-run, but we do not foresee US to grow past 16M Auto SAAR on
mid-cycle EPS estimates based on our proprietary model.
China: Bullish estimates in the short to medium term, as we see mitigants to downside from new
legislation.
Europe: Risk of GME operations fully priced in the stock, any positive catalyst provides upside potential.
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INDUSTRY OUTLOOK
General Motors
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Source: Bloomberg
IndustryTop 5 Regions for Car Sales
#1
- 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000
India
Brazil
Japan
Europe
North America
China
#1
#1
#1
#3 but close to #1 (Fiat)
Global Auto OEMs Market ShareToyota #1 12.6%
GM #2 12.0%VW #3 11.7%
#1
Car Sales
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Industry Overview
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Source: S&P Industry Survey
Market Share: GM is #1 in the United States in terms of cars sold (M)
20%
16%
13%11%
9%
8%
23%GM (20%)
Ford (16%)
Toyota (13%)
Chrystler (11%)
Honda (9%)
Nissan (8%)
Other (23%)
Trucks are really popular
0.44
0.46
0.48
0.5
0.52
0.54
0.56
0.58
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
TruckMarket
Shareasa
%o
fallvehicles
CarVehicleS
ales,
North
Americain
Millions
Truck % Car Vehicles Truck Vehicle
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Industry Overview
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Source: Bloomberg
Pent-up demand in the US car industry: The average vehicle sits at 11 years old, 130k miles on the odometer and 15-16 mpg
2001 Ford Explorer 2001 Honda Accord
WHATSON
THEROAD
2001 Ford Taurus
The vehicle parc has aged significantly: By 1.0 years on average to 10.8 over the last 5 years, after only growing 1.0 years
over the previous 10 years
8.00
8.50
9.00
9.50
10.00
10.50
11.00
11.50
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US Average Age of Passenger Cars
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Industry Overview
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Source: S&P Industry Survey
Much more pent-up demand in trucks than car
Average age ~ 11
Varied Segment Loyalty Prone to Declining Density Total light vehicles sales down
35% from 2007-2009
Average age ~ 13
Highest Segment Loyalty Geographically Advantaged GM = 41% of pickups on the road Total trucks sales down 49% from
2007-2009 Revival for homebuilding
Financial Impact on GM1) GM has $4,000 ATP gap to Ford2) GM has $2,000 ATP gap to Chrysler3) $2,000 on 1m GM units = $2b opportunity
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Industry OverviewForecasting U.S. Auto SAAR
15
Source: Desautels Capital Management Estimates
Driver: Housing
Why? Rising home prices make consumers feel wealthier which translates into larger capital outlays such as cars
High Correlations: US Housing Starts vs. US Pickup Sales: 95% Correlation Since 1990 , US Housing Starts vs. US Light
Vehicle Sales: 89% Correlation Since 1990
0
500
1000
1500
2000
2500
3000
Jan-59 Dec-67 Nov-76 Oct-85 Sep-94 Aug-03 Jul-12
Ho
usingStarts
Housing Starts
100
120
140
160
180
200
220
1/1/2000 9/1/2002 5/1/2005 1/1/2008 9/1/2010
S&P/Case Shiller Composite 20 HPI SA
Housing Price Recovery Still a Way to Go We forecast an increase in housing starts to its median
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Industry OverviewForecasting U.S. Auto SAAR
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Source: Desautels Capital Management Estimates
Driver: Interest Rates (Auto Financing Rates)
Why? As interest rates increase, it becomes more expensive to finance an auto loan
High Correlations: But car companies can artificially manipulate the financing rate by offering incentives
We forecast an increase in interest rates starting in early 2016
0
2
4
6
8
10
12
14
16
18
0
5
10
15
20
Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18
US AUTO SAAR M (LHS) 5-Year Interest RatesR= -0.368
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Industry OverviewForecasting U.S. Auto SAAR
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Based on our forecasting model, we estimate US Auto SAAR to be 15.154M in 2013 and peaking at 17.649M in 2018 before
falling back to down to 16.7M by 2020
Source: Desautels Capital Management Estimates
8
10
12
14
16
18
20
22
Jan-76 Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15 Jan-18
AUTOS
AAR
(M)
US SAAR Consensus Estimates
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Industry OverviewChina
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Estimate about 150 per 1000 people by2020. (Currently 60).
o When Korea was near Chinas
current penetration level in 1988,
they went to over 200 in 10 years.
In US, car ownership is >1100 per 1000.
China also lags most ASEAN nations.
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Industry OverviewChina
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Source: McKinsey & Co.
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Dealers are expanding into tier 3 and 4 cities or to the west, which offer higher growth
opportunities than tier 1 and 2 or eastern cities.
The only auto subsidy China offers is for energy-efficient models, where tier 3 and 4 cities
benefit more.
Mitigant to car license system to limit car ownership/traffic congestion.
Industry OverviewGrowth in Tier 3 and Tier 4 cities
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Highly correlated to GDP growth. GDP growth drives salaries, which drives personaldisposable income, which drives car sales.
Growth Forecasts (CAGR): 22% CAGR in 2000-2010. Project ~10% CAGR in volume from
2013-2020. In the second phase, penetration should slow partially due to base effect and
partially to congestion and relative saturation in tier-one cities.
Industry OverviewAuto Growth Rates
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Industry OverviewEurope
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The average driver is driving less . This will likely result in higher vehicle ages on the road (currently at 8.4 years old, but the
U.S. is at 11)
European car makers are trying to compete on price to increase volume
The volume story for the EU is more driven off of scrappage, but we do need see much growth in volume in the next 5
years
Source: Morgan Stanley Research
Auto ownership rates have stopped rising in Europe Miles driven has also peaked for car usage
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COMPANY OUTLOOK
General Motors
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Restructuring
Chapter 11 bankruptcy: restructuring and path to profitability
GM cut 17 of its 71 plants in attempts to consolidate production and reduce fixed costs by
$9 billion per year.
Furthermore, 90% of GMs cars will be made from the same core architecture in 2018
compared to 62% currently. This will allow the company to maximize economies of scale and
cut on fixed and variable costs.
Pricing discipline was key as cash rebates, lease promotions, cheap loans and dealerincentives were equal to 8.8% of the average vehicle price, compared to 9.5% for Ford.
Overall, improved pricing resulted in an $8 billion contribution to revenues.
GMs new break-even point for the GMNA division is a level of 10.5 to 11 million cars
sold in North America. Currently, the number stands at 14.5 million, well above the
estimated threshold. Even during the peak of the crisis, annual sales amounted to 10.4 million, showing that GM
will do well even in a nightmare scenario.
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RestructuringBalance Sheet
Tax loss carry forwards
First, because GM had been unprofitable for decades, massive tax loss carry forwards were
accumulated which will prevent the government from collecting its piece of the pie until
2017. GM is carrying forward $45B in losses going forward.
Debt
The balance sheet looks much cleaner after bankruptcy and restructuring, especiallycompared to Ford:
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GM Ford
2008 2012 2008 2012
Liabilities/Assets 193.50% 75.20% 106.70% 91.40%
Debt/Equity - 43.40% - 644.10%
Debt/EBITDA - 1.9x 19.7x 8.8x
EBITDA/Interest - 17.5x 3.9x 16.6x
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Innovative products
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2013 Chevy Volt
2014 Chevy Silverado
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Competitive Positioning
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Quality
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Index of perceived quality, based on average ratings from more than 50 consumer reports for2011 models.
Most specifically, the Buick brand ranks second among perceived quality in the US.
62.0
64.066.0
68.0
70.0
72.0
74.0
76.0
78.080.0
82.0
84.0
Source: CIBC World Markets
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Light Trucks
Trucks currently account for 62% of the product mix, while they contribute to approximately70% to 80% of EBIT.
The new revolutionary line of Chevy and GMC trucks will help reverse the negative market
share trend that moved mostly to Chrysler, which updated its line last year.
The many updates to the Silverado and Sierra are new, aerodynamic designs inside and out,
three more fuel-efficient engines, and many other extra features.
Ford will only be releasing its updated versions next year, which will give GM somewhat of afirst-mover advantage, as was the case with Chrysler.
32
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Chrysler Ford General Motors
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GM FinancingAmeriCredit and Ally Financial International
AmeriCredit acquisition
In 2010, only 4% of GMs sales were to subprime customers, which represent about 40% of
the population.
Compared to an industry average of 21%, GM sold only 7% of its cars through leasing
programs.
AmeriCredit did well even in the financial crisis.
Ally Financial Intl acquisition
Lack of lending control put GM at a 10% to 15% sales gap disadvantage compared to
competitors internationally.
Acquisition compliments efforts to grow market share in countries like Brazil.
Overall, GM can use its financial arm as a tool to fine-tune its global sales strategy.
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Europe and Opel
Currently, the overall industry outlook is unfavourable and the market is highly pessimisticabout GMs chances to turn around its Opel division.
GM turned down an offer from Magna in 2010 to acquire Opel.
Analysts estimate that Opel reduces GMs enterprise value by -$17 billion.
Potential catalysts?Acquisition: Fiat is rumoured to be interested in the German car maker.
Restructuring: 2 of the existing 11 plants will be closed in the next 5 years (Antwerp,
Belgium and Bochum, Germany), reduced inventory
High brand equity: #3 brand in Europe, very popular in Russia and other Eastern European
countries
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RISKS AND CATALYSTS
General Motors
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VALUATION
General Motors
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ValuationComp Table
Comparables Table Mkt Cap ($B) Price ($) Debt ($B) Debt/EBITDA Profit Margin (%) ROE (%) P/E 2013 P/E 2014
U.S. Auto Manufacuturers
GENERAL MOTORS 37.99 27.80 5.2 0.15x 3.0 17.1 8.28x 6.42x
FORD MOTOR 49.68 12.95 104.3 7.46x 4.4 36.6 9.38x 7.83x
DAIMLER AG 58.66 54.93 111.7 6.94x 7.5 14.6 8.95x 7.78x
Japanese Auto Manufacuturers
TOYOTA MOTOR 172.5 50.03 148.9 6.05x 1.9 7.2 16.70x 11.54x
NISSAN MOTOR 41.59 9.20 56.2 4.66x 2.4 9.8 10.65x 8.04x
HONDA MOTOR 66 36.43 52.9 4.28x 3.2 8.1 15.34x 10.58x
MAZDA MOTOR 8.25 2.75 8.8 7.87x 3.9 7.6 26.47x 10.66x
SUZUKI MOTOR 12.59 22.44 5.1 1.93x 1.1 6.2 16.16x 12.73x
MITSUBISHI MOTORS 5.97 0.99 3.7 2.65x -3.0 29.90x 11.74x
Japanese Auto OEMs Average 19.20x 10.88x
European Auto Manufacuturers
VOLKSWAGEN 89.75 188.60 155.3 4.82x 3.4 32.2 6.76x 5.85x
RENAULT 18.59 62.88 43.6 8.18x 5.0 7.3 6.15x 4.89x
BAYERISCHE MOTOREN WERKE 56 87.32 91.7 5.79x 5.8 17.8 8.70x 8.43xPEUGEOT 2.58 7.27 43.0 14.09x -16.2 -42.4
FIAT 6.68 5.34 36.8 3.51x 0.5 3.9 10.01x 6.04x
European Auto OEMs Average 7.91x 6.30x
Korean Auto Manufacuturers
KIA MOTORS CORPORATION 20.09 49.53 3.6 0.85x 8.2 25.5 5.90x 5.34x
HYUNDAI MOTOR 43.96 199.55 42.5 4.13x 10.1 21.0 6.42x 5.89x
General Motors 37.99 27.80 5.2 0.15x 3.0 17.1 8.28x 6.42x
Global Auto OEMs Average 11.5 12.52x 8.29x
Japanese Auto OEMs trade at a higher premium but P/E multiples come down in 2014
GM trading as low as European Auto OEMs, is this justified?
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RECOMMENDATION
General Motors
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Recommendation
The Industrials sector recommends a BUY at $28.00 which is 8.2x 2013 EPS. We have a2013 year end price target of $35.0 applying a 10x PE multiple on our 2013 EPS estimate of
$3.50.
We recommend liquidating our entire position in CAE and be replaced with General Motors.
Going forward, Conrad Industries and General Motors would represent our two core
holdings, positions with which we feel confident that we will outperform our sector
benchmark.
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GM quickly turned around with innovation and matched its products with those of the
competition.
While Ford moved towards creating global cars like the Focus that would be attractive to
markets like Europe, GM stuck with making larger, more comfortable cars that are appealing
to the American consumer.
Chevy Cruze Ford Focus
Fuel efficiency: 28/42 mpg 27/38 mpg
Safety rating: 5 stars 4.33 stars
Price: 19,510$ 18,918$
Quality ranking: 64 65
AppendixProductsCompact Car
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Source: Credit Suisse
Huge divergence in-between consensus and market implies EPS growth rates: Larger margin of safety for GM
GM Tax Rate consensus is 20% (Source: Credit Suisse)
AppendixValuation
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Source: S&P Industry Survey
Historical Sales Trends
2,9562,073 2,211
2,504
1,942
1,630 1,9052,111
1,448
9271,080
1,362
1,429
1,151
1,231
1,147
2,218
1,770
1,764
1,645
952
770
9091,043
2,251
2,081
2,455
2,924
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2008 2009 2010 2011
GM (20%) Ford (16%) Chrystler (11%) Honda (9%) Toyota (13%) Nissan (8%) Other (23%)
Otherincrease fromHyundai + Kia
AppendixIndustry Overview
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Source: Desautels Capital Management Estimates
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
10,000,000
11,000,000
12,000,000
13,000,000
14,000,000
15,000,000
16,000,000
17,000,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
European Passenger Cars New RegistrationsWestern Europe Total Eastern Europe
AppendixEurope
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Regression models
Source: Desautels Capital Management Estimates
Regression Outputs YoY increase
Year Interest Rates
Unemployment
Rate
New Home
Sales
Housing
Starts Model 1 Model 2 Model 3 Model 4 Average Consensus YoY increase
2013 0.76000 7.7 450.0 940 16.428 13.7238 15.118 15.206 15.154 15.1
0.76000 7.45000 481.25000
2014 0.8 7.2 512.5 1034.000 16.920 14.3513 15.808 15.828 15.767 15.6 4.05%0.76000 6.90000 543.75000
2015 0.8 6.6 575.0 1137.400 17.372 15.0688 16.481 16.372 16.343 3.65%
1.01000 6.39000 606.25000
2016 1.3 6.2 637.5 1251.140 16.890 15.4768 17.426 17.158 16.906 3.44%
1.51000 5.97000 668.75000
2017 1.8 5.8 700.0 1376.254 16.377 15.8848 17.089 18.073 17.343 2.58%
2.01000 5.55000 700.00000
2018 2.3 5.3 700.0 1513.879 15.541 16.1153 17.100 18.792 17.649 1.77%
2.51000 5.27000 700.00000
2019 2.8 5.2 700.0 1438.185 14.676 16.0938 16.911 17.945 17.022 -3.55%
2.80500 5.35000 700.00000
2020 2.9 5.5 700.0 1400.000 14.485 15.79725 16.250 17.793 16.766 -1.50%
AppendixIndustry Overview
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Source: Bloomberg
70
75
80
85
90
95
100
105
110
115
1/1/2008 7/1/2008 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 1/1/2013
USD/JPY
Since September 2012, the Yen has devalued 19%; however, it is still strong when looked at on a 5 year basis Pressure on pricing is down: Weakening yen could tempt Japanese OEMs to turn up incentives; however, the impact is likely
to be muted as a significant part of Japanese sales in the US are sourced from the US
AppendixForecasting prices
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