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Wednesday, November 10, 2010

GM : The Retread...

There is much fanfare again over the fascist poster child “Government Motors” as it appears they managed a $2.16 Billion profit (undiluted) in the third quarter. Cue the trumpets and streamers, fire up the band and set off the fireworks!!!  Yahoo, all is well in America again as goes GM so goes the nation….call me a skeptic but something stinks in this deal.

Wow the government and the media must think we are all either really stupid , forgetful or this is part of the if you tell the lie large and long enough it becomes fact. I mean come on already. I know GM has an IPO coming out next week that the Government is hoping to scam unsuspecting saps to purchase so as to extract our collective money. I am buying stock in Avon as there is not enough lipstick in the world to put on this pig. Look I am as American as the next guy and grew up with GM and I would like to see them succeed but by their own merits would be good.

The site Pro Publica has a breakout of the entire bailout history for General Motors and according to their log, Government Motors was committed $50,744,649,329 (in spite of the fact that the media keeps throwing around a $52 Billion figure) which in essence accounted for just about 80% of the company. According to my memory and Pro Publica’s documentation the entire $50+ Billion was in the form of loans to be paid back, as well as equity stakes in the company to be sold later to retrieve a fractionof  our money at a supposed profit.  If you count the fact that they carved out GMAC Financial and rebranded it Ally then the figure loaned to GM under the Automotive Industry Financing Program is actually more like $66 Billion; GMAC received $16.2 Billion. For the current discussion we will not look at the Ally figure.

If you think back dear reader to April 26th there was much talk in the media and the White House about how GM was paying back $4.7 Billion to the US Treasury and $1.1 Billion to the Canadian Government. . It turns out that GM made the payment by robbing the taxpayer to pay the taxpayer with TARP money, yet somehow this was let to slide. GM must have learned well from the FED and did their own version of money from nothing. What they did is a kin to trying to raise the water level in your pool by taking buckets of water from the deep end and pouring them in the shallow end, yet they get a media celebration and not even a reprimand at the least; I am sure that because at the time this was uncovered by a Republican Senator and being the minority in both houses it got squelched to avoid any embarrassment to the Democrats….for shame and for the record I would feel the same way if the parties were reversed.

So today GM is reporting again with great fanfare that its net income was $2.16 Billion. If you look at the balance sheet on a diluted basis earnings were just over half of what is reported at $1.3 Billion. I think with the available information that GM is very difficult to truly value properly. Some analysts like Deutsche Bank’s Rod Lache feel that GM should be valued at $64 Billion which would give it a pricey PE of about 23 times diluted earnings and almost $43 per share with the full 1.5 billion shares issued. Mind you dear reader that at GM’s peak in May of 1999 GM had a market cap of only $61.3 Billion.

“GM plans to raise as much as $10.6 billion by selling 365 million shares at $26 to $29 each, according to a Nov. 3 filing with the Securities and Exchange Commission. The company also will offer about $3 billion of preferred shares that later will become common stock. GM has said the offering may price as soon as Nov. 17.”  GM is only issuing an IPO for 365 Million shares but the initial buyers will be diluted for quite as they will issue new shares in the future to rid themselves of the governments remaining 40% stake. So if we take GM's word for it and the shares are issued at $26 and all 1.5 Billion trade at that level the company would sport a PE of 13. No matter how you slice it GM will be more expensive compare to Ford, their American competitor who is also profitable sporting a PE just under 10, but did not take any government money.

The Car Czar, Steven Rattner, appears to be optimistic on GM and he claims that through the sale of the treasury’s stock they will make $7 Billion, he seems to forget that until all the loan is paid back the US is not making anything it is just recovering principal; so there is still risk. He feels that GM is definitely on the right path, but he is the car czar does anyone truly believe that he would say anything negative, especially with a new book “Overhaul” out now.

Additionally, GM’s pension liability which was one of the issues that got them in the mess in the first place is growing in this last quarter it grew $3 Billion from $26 Billion to $29 Billion to me this is a warning flag.  Moreover, GM is stating that they can earn $19 Billion using the rosy assumption that vehicle sales return to near the lofty levels of 17 million a year; that sounds great for an IPO presentation but that is hardly a realistic figure to expect those kinds of returns. The current book value per the GM balance sheet ((Total assets – intangibles) – total liabilities) stands at a fictitious $26 Billion, since their loan payments(liabilities) are on hold by Uncle Sam. GM is going have this IPO offering to pay back the Government, but they are in a capital intensive business that requires constant investment for upgrading. Ideally GM would need the capital from the IPO to handle the capital spending requirements and deal with their pension gap. The  money raised by the IPO is not going to GM’s coffers like in a regular IPO but instead the shares are “granted” to the government who will sell them into the market as a result GM shareholders returns are going to be impacted going forward because the money needed for GM’s operations has to come from somewhere and that will be their EPS meaning investors will get the short end.

“Chief Executive Officer Dan Akerson, who took over from Ed Whitacre on Sept. 1, has said GM can make “significant” profit even amid a U.S. auto sales rate that is running about 30 percent slower than before the financial crisis. “ Sure any company could make these kinds of numbers if you apparently never have to make any loan payments.

“The automaker, 61 percent owned by the U.S. government, reduced costs through bankruptcy and is selling new cars for higher prices. Once again if you discharge all the debt they owed through bankruptcy then of course they will make money, now if they actually had to structure their debt and pay it they would still be in a deep hole.

“GM’s numbers were as advertised and they were good,” said Joe Phillippi, principal of consulting firm AutoTrends Inc. in Short Hills, New Jersey. “As they ramp up production -- assuming people like their cars -- in three to five years, they could be hitting some much bigger numbers.” There are a lot of assumptions built in to this  for sure ranging from the ability of GM to actually contain costs and introduce better models than the Volt, which you may have noticed has disappeared from public view.

The problem with all of this is that GM was given a bye in this whole process and has not really had to cope in is financial issues in the sense of balancing between investing in their business, cost cutting and being forced to make debt payments while conducting regular operations. There is much talk about cost reductions; however, if it were not for the benevolence of the US taxpayer GM would still be in a world of hurt at best. Just by the nature of everything being made so simple for GM and the Unions once they are out from under the thumb of the government how long will it be before they revert to the ways of old. If I had to bet on a manufacturer I think Ford has much more “Street Cred” than GM even with their real cash and liability position. To paraphrase an old Smith Barney tag line “they made their company the old fashioned way they earned it.





So GM is going to offer 1.5 Billion shares which assuming the shares trade at the IPO price technically takes the taxpayer’s percentage of GM down to 40%. Of course the Government can’t sell all the shares at once or it will crater the market. Right now the pundits are predicting that the US will make a profit by selling the taxpayer’s equity stake because they believe the shares will trade up to $45 each.  Of course all of this is predicated on GM sustaining its sales momentum and that is tricky as they may not continue their streak of introducing interesting models, keeping costs down or if they have some sort of manufacturing problem that calls GM’s credibility in to question. As an investor I would want to see a bit more of a track record before plunking down my cash as 2 successful quarters does not a good investment guarantee.

The thing that bothers me about this whole scenario is the numbers don’t seem to add up at this point. The Taxpayer’s stake is reduced to 40% after the IPO, yet the remaining debt is still sitting not being serviced, I know I would love to get the terms that GM got when I take out a loan. At this point with GM I am like Missouri “Show me”, it needs to prove itself more than just a couple quarters. Maybe I will miss out on some upside but until I feel more comfortable with the earnings projections and the debt situation, I’ll take Ford instead.

Disclosure: No position in Ford anymore....No position in GM

2 comments:

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