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Sharing Speculative Interest in GM

by: Jason Kelly August 27, 2008 | about stocks: GM    

Jason Kelly

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Everett writes:

You write a lot in your stock book about Value Line and how much you respect their opinion. Yet, you say you like General Motors (GM) below $10. Value Line hates it. What gives?

Liking General Motors below $10 doesn't mean I'm buying yet. What I've written to subscribers and mentioned in interviews is that The Kelly Letter is watching to buy the stock below $10. Our line in the sand is actually $8.

Watching is the key. I often watch stocks for weeks, months, and even years in some cases before buying. We're also watching for the right time to buy Russia, but that doesn't mean we're buying yet. Is it cheaper than before the Georgia invasion? Sure, but it may get cheaper still and, in fact, has been doing just that.

Similarly, is GM cheaper than before its latest management blunder? Sure, but that hardly instills confidence. The company was building SUVs while Toyota (TM) switched to hybrids, as oil prices were gearing up for a major push higher. The company says nobody could have known, but other companies seemed to have had a pretty good finger in the changing winds.

My interest in GM is speculative. At some point, even GM will be cheap enough to cover for putrid management. We're getting to the zone where any idiot will be able to do better than the current gang in charge, and that's when you want to start buying for a recovery -- assuming the place has the financial wherewithal to survive. Sometimes they don't.

As for what Value Line thinks, it's not much different than what I think. Here's the Aug. 29 commentary from Value Line analyst Jason Smith:

The lure of General Motors' shares is mainly as a very speculative long-term recovery play at this juncture. Investors already on board here have watched the stock's price plummet to a level not seen in five decades. Historic earnings losses, a sizable cash drain, and a worsening operating climate are only a few of the forces scaring away investors. And with GM's stay in the red probably extending into 2009, the stock will likely plod along at a depressed valuation in the near term. Indeed, the issue currently holds our Lowest rank (5) for relative year-ahead price performance. In addition, the Safety rank is Below Average (4) and the company's Financial Strength rating has fallen two notches, to C+, since our May review. We do believe GM is capable of a turnaround and, thus, foresee better days ahead for these shares. Still, those eager to take advantage of the stock's substantial regression must be willing to face what will likely be a very tumultuous ride.

The company needs to stop burning through its cash. The quarterly depletion is in the $2 billion-$3 billion range. GM has suspended the dividend, which is a necessary move. A 20% workforce reduction and the sale of $4 billion in assets, including the Hummer brand, are also part of the cost-saving blueprint. In all, GM aims to trim its cost structure by $10 billion through 2009.

Further inventory reductions are also likely. Sizable production cuts are already under way and a return to "employee pricing" should help. These discounts provided a sales spark back in 2005 and may do the same this year, though, for now, the timing of the promotion is very limited.

A showroom makeover is a critical piece of a turnaround here. U.S. sales continue to decline, falling 26% in July, to just over 233,300 units, primarily due to sinking demand for SUVs and trucks. GM is stepping up its efforts to get into the fuel-efficient small-car game, including the anticipated 2010 launch of the plug-in hybrid Chevy Volt.

I don't see much difference between my stance and Value Line's.

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This article has 18 comments:

  •  
    Aug 27 10:19 AM
    GM is paying the price for its "original sin" of killng the Electric car. GM claims that they were "afraid to sell them", and this fear transfixed them like a deer in the headlights of the night train of history.

    So now, they are beginning to pay the price.

    But their penance is much more extensive than just lip service and greenwashing; failures at GM involve the Board of Directors, the executives, the entire philosophy of "warring on your own workers", their craven "blame someone else" theory of non-accountability, and many other failed mechanisms of arrogance and idiocy that must be rooted out.

    But the people who should be fired, are the ones still running this thing into the ground. Even $50B more from the public purse will just stoke the fires of failure, more billions they can throw away after the ones they already squandered.
    Reply
  •  
    Aug 27 10:30 AM
    Sorry, but this stock is not a buy at any price that is significantly above ZERO. They can't stop bleeding cash. No way that could happen except if they file for Ch 11 and restructure. But that would mean wiping out common shareholders. GM is micro-study of the USA and you will have ample opprtunity to see how excessive debt burdens, excessive spending schemes will kill any company and any country - no matter how great the products that are produced. Do yourself and your clients a favour and keep away from GM. be it at $8, $6 or $3
    Reply
  •  
    Aug 27 10:44 AM
    One way for GM to conserve their cash would to be quit spending obscene amounts of money on television advertising that advertises products they will not be available for at least 2 years, if ever, e.g. the Volt and a fuel cell car. I understand the thought about creating a demand for a future product, but a 2 year lead time is a bit long for a company that is cash strapped. Managements' excuse for not seeing the oil crisis coming is a complete lack of vision.
    Reply
  •  
    Aug 27 12:05 PM
    Book value is ($101) per share. In truth, it's worse; they still have $4.6b in deferred tax assets on the books, another $1.1b in intangibles, and $18b in "overfunded" pension assets.

    TM's return on assets is 4%; let's assume that somehow GM manages to survive and returns to profitability in 2010, and that ROA reaches 5%. Quiz question: when will book value reach zero? Answer: late 2018. One can only look at this stock as an out of the money call. What's the upside? TM trades at 0.6x sales. If we generously assume GM's sales immediately stop falling, our target price would be in the $170 range. In other words, a 10-year turnaround to reach Toyota-like financial health and performance, accompanied by no further decline in sales, would yield an annualised return of 35% plus any dividends.

    As an alternative, why not buy the senior notes? They're available at several maturities with yields around 20%. Suppose we buy the 2048 paper, now yielding 18%. If the company does survive we would expect this paper to perhaps double in value; in the meantime we've collected nice fat quarterly coupons. If we reinvest in the (appreciating) paper, we'd expect a 10-year annualised return in the 20% range. Obviously, not as good as the common. But the risk is much better: if, as seems far more likely, the company does not survive, we will likely recover at least some equity in a newly-restructured entity (and keep probably at least 2 or 3 coupon payments as well). Worst-case losses are probably around 50-60%, and we'd end up with equity in a much healthier balance sheet.

    If you're really bullish on GM, buy both, consider the preferred, or buy the notes and invest the coupon payments in the common. But I definitely would not hold the common by itself; the risk/reward is highly unfavourable unless you are absolutely convinced there will be no dilutive or destructive restructuring.
    Reply
  •  
    Aug 27 01:08 PM
    The notion that GM management is solely the blame is conclusion of the ill informed. The North American market has been quite different than in almost every other developed country in the world. A year and a half ago GM's truck plants were working on maximum overtime and Toyota Priuses had incentives on them (check it out if you don't believe me).

    Toyota and Nissan recently entered the full size pickup and SUV markets in force, spending billions in the process, and they are suffering in these segments too. Luckily, they have to have a broader portfolio of small fuel efficient vehicles thanks, in part, to a protected home market in Japan. How does this help? They are able to develop and sell fuel efficient vehicles profictably in guaranteed volumes and not be subject to the fickle swings of the American consumer.

    Take a closer look at GM/Ford/Chrysler vehicles on a value, fuel economy or other basis -- especially the latest ones like the Chevy Malibu, Ford Flext or Cadillac CTS -- with their Japanese competition and you will see that they compare quite favourably. Maybe all the product line up is up to their standards in all cases, but it still competes favourably. It's American's perceptions that are doing the Big 3 in and some of these are based on old facts or information that isn't current.
    Reply
  •  
    Aug 27 01:12 PM
    I was a two time Chevy Astro buyer, but when they didn't want to retool and stopped making them and made new Hummers instead, I bought a Toyota Sienna.
    It's a double loss for them because they lost my business, (I like Toyota now, they treat me very nice also). They also have to get rid of the loosing line of vehicles, They should have saved it for the Army. It's a sign of them being greedy and out for their profit and not the customer. I always had problems with GM warantee service anyway.
    Reply
  •  
    Aug 27 02:31 PM
    I bought and meticulously maintained a new 2004 Toyota Sienna and it cost me nearly $3,000 in unwarranted repairs before it hit 70K miles. So spare me the "Toyota-is-wonder... schtick. The dealership was arrogant and uncooperative as hell. I'll never own another. I've owned much better U.S. brands.
    Reply
  •  
    Aug 27 08:11 PM
    I could write a book on this, but will be brief:

    1. Yes, Toyota did continue building the Prius when it was not selling. This only makes the point any business student would know--don't put all your eggs in one basket. When the market turned, their fixed-cost losses multiplied daily. For years, the 'former big 3' gave only lip service to investments in cars and fuel economy.

    2. Don't kid yourself, GM (and Ford/Chrysler) have known for years about the coming 'peak oil', about the possibility of terrorist attacks on Mid-East oil, and about the growing gasoline demand from emerging markets (which they helped to feed). Yes, they KNEW gasoline could go quickly to $4, $6, and even $8 in a very brief period--and that they might not have time to retool their plants. They simply made an informed (but stupid) decision to try to maximize profits, knowing the costs of being wrong.

    3. GM and the others agreed again and again and again to clearly uncompetive labor agreements that paid unskilled workers $50 per hour, plus benefits unavailable to 90% of the population. Together with the UAW, they made kings of the common man (which is fine if you don't mind unskilled workers being more highly compensated than you).

    4. The 80's and 90's are replete with one agreement after another curtailing foreign (mostly Japanese) competition to give our car makers 'breathing room'--which they obviously squandered every time!

    5. Bankruptcy is not an option. You might buy a $500 airline ticket from a bankrupt airline for a trip next week or month; but you would be a fool to invest $30k in a vehicle from a bankrupt GM. You don't expect your ticket to have a value after landing; but you certainly expect your vehicle to have a value after 3 or 5 years.

    6. What does ther term American made mean today? We have a host of wonderfully competitive high quality vehicles made in America by Toyota, Honda, Nissan, and others. With even our 'formerly big 3' vehicles containing 30-60% foreign parts, there is no logic in loyality to GM.

    7. It would be a huge mistake to bail out GM and the others. Yes, it would be painful for employees and shareholders. However, one of the best features of capitalism is "creative destriction' -- from the ashes of failed businesses rise new and more better businesses. DO NOT BAIL THEM OUT!
    Reply
  •  
    Aug 28 10:47 AM
    The current spike in oil prices may seem "inevitable" in hindsight, but the reality is that it caught all carmakers by surprise. (Check out that brand new Toyota pickup plant in Texas...) The fact is, GM began a major transformation of its business starting early this decade, and as a result, we are well positioned to weather this severe downturn and emerge a leaner, stronger company.

    GM now develops most of its products globally, giving us the ability to respond much more quickly to market shifts. 11 of our last 13 new products were cars and crossovers, and 18 of our next 19 launches will be cars and crossovers as well. The 2007 agreement with the UAW transforms that important relationship and bring GM's costs here much closer to those for non-union transplants.

    Finally, check out our newest products -- CTS, Malibu, Enclave, Aura. They are winning awards and gaining sales in a very tough market. Those should be proof enough that we are here to stay.
    Reply
  •  
    Aug 28 01:02 PM
    Buying stock in GM would give new meaning to the old term, "Catch a falling knife!"
    Reply
  •  
    Aug 28 01:25 PM
    Tom Wilkenson:

    You are dead on right, but you will find that the unbelievably naive news media and general public can't, or won't see this. You and I both know that GM will emerge from this, probably without any help from the government, and these people will still have some reason to dislike GM, whether it be the EV1 wacko's or others with some ax to grind. They will continue to write these moronic articles (yawn) until they finally get it, or more probably, someone tells them.

    It will be important that GM continue to produce great cars as they have done on the Malibu, CTS, Enclave, etc. to convince the NYT, USA Today, LA Times, etc. what Edmunds.com and even Consumer Reports have already discovered.

    So let the so-called "experts" who normally impersonate financial analysts and who live in Japan (probably hasn't even driven a GM car in years because of restrictive protectionist trade laws in Japan) continue to write about things they know absolutely nothing about. The people who know and understand cars know that the product excellence tide is turning. It will be interesting to see these people squirm when more people understand.

    I think they should stick to the financial community, there's plenty to pontificate about there for sure.
    Reply
  •  
    Aug 28 05:26 PM
    elroy & milkin: Good thinking; BLAME THE VICTIMS, and never, ever blame the people in charge of the company whose bad decisions and greed brought the company to its present state.
    Reply
  •  
    Aug 28 07:50 PM
    Ace2:

    I am not arguing that mistakes haven't been made, but if you study GM closely you will see that the mistakes made were from previous senior management of GM. Jobs banks for instance date back to the 1970's. Health care initiatives were agreed upon years ago before the health care industry went berserk (why doesn't everyone complain about them?). This group of GM leaders has essentially brought an end to the JOBS bank, negotiated the end of health care in 2010 with the VEBA, and instituted a second tier wage agreement.

    Yes, GM continued to sell the cars and trucks that people wanted...that is their mistake. But not theirs alone. Toyota has spent over $5 billion in recent years trying to edge into the truck market. Only trouble was that their product didn't measure up. Honda didn't get hit too hard because they couldn't sell a Ridgeline if their lives depended on it.

    As Tom Wilkinson points out, GM DID recognize the trend 2-3 years ago and has brought out some marvelous cars with more on the way. The only question is if reality can outrun misinformed perception.

    Please do your homework before posting.
    Reply
  •  
    Aug 29 03:28 AM
    Jason
    GM is not delisted from DJIA 30 list even at $8. How come? I had written to Dow Jones to have GM delisted because UAW was all over GM. Then UAW accepted buyouts by tens of thousands. Gasoline is falling now and it is not a pull back by any definition. It is in a free fall. I can only hope for back to $2. However the transition to smaller fuel efficient cars is now permanent. I dont think Americans will ever forget the days of $4.50 for next half century. Now It is time to build small cars for Big & Tall Men as we will not build enough gas guzzlers to put all of them in ever again. Time to adapt to small cars with bigger driver seats, deeper legroom, raised half of rooftop over driver seat, beefier shocks on driver side to keep small cars level. I remember how big, fat , or tall men looked ridiculous driving small cars back in the 1970's. It is doable and it will sell like hotcakes!
    Reply
  •  
    Aug 29 03:30 AM
    GM speculative not to me but perhaps to cluckers like yourself...
    Reply
  •  
    Aug 29 03:37 AM
    The only reason we bought a lot of SUVs and PickUps is to build an artifical financial bridge toward costlier alternate energy future. the bridge had collapsed. The alternate energy doesnt mean that we need to pay $4.50 for gasoline in order to make alternate energy look affordable. Oil investors were hoping that they could both profit from high oil stocks and rising alternate stocks at same time.. We are not suckers ... We chose the conservation path and it works.... Gasoline prices is falling and altenrate energy stocks are stopped in their ascent for unknown periods of time before it probably resume later. Those oil / alternate energy investors are not really concerned with the plight of many famiilies losing homes due to foreclosures as results of soaring energy prices . Now you walk up and write about GM as a speculative play. If I find you , I would punch you in the face.
    Reply
  •  
    Aug 31 08:16 PM
    After general motors survives the chrisis they are in if they ever GM management will take all the credit for this. I wonder if they will take all the credit for hurting thousands of ex GM employees who have lost their health care when they are in need of it the most.(people over 65) We can also thank the government to have allowed this to happen. Regardless of what happens GM 's executives getting their millions of dollars for making all the bad decisions will get their bonuses. GM salary employes will suffer the most. Also what a lot of people dont know is if GM files bankrupcy they try to take part of their pension away. The GM executives can take credit for that also.
    Reply
  •  
    Aug 31 08:45 PM
    archie:

    It's clear that you don't understand anything about what you're writing about...don't feel bad, neither does the author.

    1. For the thousands of people they are taking health care from. I am one of those. Here are the facts. Medicare kicks in exactly when you're 65. GM is raising everyone's pension $300 so you can buy Medicare gap insurance to cover what the GM insurance doesn't cover.

    2. GM has already announced there will be no bonuses at least this year. I doubt next year too.

    3. Executives will lose FAR more than anyone else will if they declare bankruptcy. About 2/3 of their pension is NOT guaranteed by the government like a non-executive salaried person.

    When you sober up. look it up and read the newspaper, you might learn something.
    Reply
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