Thursday, November 18, 2010

GM Zombie Reanimated

GM supposedly sold stock today that implies a current p/e around 6.2 (earnings around $8B, market cap around $50B), compared to Ford at 8.3. I am confident GM will fail in the long run, but that's a long time from now.

GM was a money loser for years, and when you considered their off-balance sheet liabilities, insolvent since the early 1990's. In June 2009 the equity owners were finally basically wiped out, and bond owners got about 15% of their principal. The new GM bought many of the assets and the trademark "General Motors" from the old company, has many of the same employees, and sells many of the same brands. Basically, it's the same company, just without all those pesky liabilities (debt went from $97B to $17B)!

Looking above, you can see their 'official' Liabilities/Asset ratio was pretty stable around 0.90 for a decade prior to the financial crisis. With creative accounting, they looked viable, until the losses made this impossible. Currently, the liabilities/assets ratio is around 0.80, and this is a much 'cleaner' number because many of the overvalued assets were transferred to the US Treasury. Given Ford's Liab/Asset ratio is around 1.03, I'd say GM is a better buy for the same price-earnings ratio, meaning: buy GM/sell F.

Just don't put it in your kid's college fund into GM and forget about it. GM didn't die due to bad luck, their cost structure was and still is not competitive with the Japanese. In the same way that a spendthrift whose rich dad pays off his credit cards every so often has no incentive to become frugal, GM has no need to make hard decisions. It will survive one, maybe two, recessions.


Erik said...

I'm not buying, but there are some real positives at GM. They have the largest US market share even after cutting from 8 core US brands to 4, have closed plants, the new UAW retiree healthcare plan saves about 3 billion per year, hourly labor costs have dropped from 16 billion in 2005 to 5 billion (granted, on lower volume), etc. Some may balk at the current level of government ownership, but that should be temporary. I'm not necessarily optimistic, but I am hopeful we can have a strong US auto industry again.

Unknown said...

"Liabilities/Asset ratio was pretty stable around 0.09 for a decade prior to the financial crisis."

Did you mean to say 0.9? Or was the accounting that far out of whack?

Eric Falkenstein said...

oops! Thanks! (it was 0.9)

Anonymous said...

I am hopeful we can have a strong US auto industry again.

why? I don't really see how it matters what we produce.

Erik said...

Anonymous, I'll be honest and admit I have a particular emotional attachment to some American cars (Ford Mustang, etc.). Maybe economists don't think that is rational of me, but beyond that, I also want lots of choices in what to buy, especially by those well-placed to understand the American consumer. I don't want American cars to continue only due to government subsidies - I want them producing efficient, fairly priced, reliable, and beautiful vehicles that people all around the world want to buy. You might say that you don't care where items are produced, and I can see that point, but why not be the research, development, and production leaders in a multi-billion dollar world industry with a likely very long future ahead of it, unless you just assume it isn't possible to do profitably in the USA? If that is so, fine, but I certainly don't believe it yet, due to resources in technology, education, and capital present in the USA.