As a follow up to a prior post “Why is no one bothered?”, I find myself writing about General Motors once again. There are several issues going on here that have all made it in to the various mainstream news outlets, yet it appears that the reading public sees these things and is either too busy or complacent to be bothered with the chicanery they are funding.
First, there is a an AP article in Bloomberg Businessweek online entitled “Analyst: GM could print money as sales recover”. On the face of it the article appears as a nice piece showing the recovery in GM and discussing the IPO rumored to be happening in November. The analyst in the article makes very optimistic assumptions about GM’s prospects and vehicle sales figures to conclude the a) GM will “print” money and b) that the shares of the IPO should fetch a fair value of $134 per share. Moreover, the article makes the assumption that GM could still make money even if vehicle sales in the US slump to 10.5 to 11 million units; currently sales figures are running at 11.5 million. This assumption is on the heels of an announcement by GM that the four brands sales decline 11% from 2009 “cash for clunkers” level (GM’s Website 9/1/2010 sales and production release) . The releases from GM have been touting large percentage increases in sales versus 2009, point in time where few people wanted to buy a vehicle for economic reasons let alone from GM a company in bankruptcy. If it was not for the “cash for clunkers” programs GM would probably be reporting triple digit sales increases instead of just double. Another Item I have noticed is that while inventories have been running well below 2009 levels when GM could barely give away their vehicles they are creeping up and need to be watched carefully as an indicator of management efficiency.
The assumptions for the auto industry and GM in particular are way to rosy in my opinion. Between the on going weak job and credit markets I believe this is going to be a much tougher slog than the analyst is expecting. While there may have been a spurt of activity for a couple months from the incredibly depressed levels of last year it remains to be seen if this was an aberration or the start of a trend. In my estimation there will always be some underlying demand and it could be that just coincidentally people’s vehicles give out in waves which may account for the surge in demand over the seven month period starting in January 2010. I also believe that all the manufacturers discounting promotions as well as “cash for clunkers” created a demand pull situation; meaning the manufacturers pulled sales forward instead of allowing for a longer term more even distribution.
Back to that analyst David Whiston’s call that the IPO for GM shares could have a preliminary fair value of $134 per share and could be a good investment, I am suspicious. Just yesterday I read an article in the Washington Post that according to the inspector general of the government’s bailout program, in order for the US to recoup its $50 Billion it needs to sell its 61% ownership stake for $134 a share. Now this could be coincidence that the analyst agrees with the inspector general and is justifying it in his article, however, the figures are coming from the government and one could have made a fortune over the last decade by investing opposite of what the government tells you. If you need an example of this just look at all the reassurances and estimates regarding subprime, remember how it was all contained and would not affect the general economy? On this issue I am like Missouri “Show Me”. I am not buying the sizzle here and believe that investors that purchase the new GM shares for $134 will be sorely disappointed as the rosy assumptions will not be met in the near future as the economy gyrates, so will GM and its share price .
In a separate issue there was an article tn the Wall Street Journal yesterday titled, “GM Resumes Political Giving”. I had written an earlier piece titled “Why is no one bothered” which dealt with the topic of GM resuming political donations while still on public life support. Regarding the current GM Political giving the timing is interesting to say the least as they are contributing to US Senators right as the time nears for the IPO. It seems to me that while on public funds they should be restricted from making contributions to anyone or organization. Additionally, the current donations may be perfectly legitimate and unrelated to the IPO, but it does have the appearance of politically greasing the skids ahead of the offering.
I guess time will tell if GM is a good investment, but I find it difficult to tell if Uncle Sam is selling snake oil or not. Call me skeptical but I would not buy GM and neither should you.