Should You Believe in General Motors?

Dear fellow Americans: I tried, but it didn't work out.

I tried to do my patriotic duty by offering to take a few shares of General Motors (NYSE: GM  ) off of our government's hands, but it was not to be. I registered my interest via my broker (Fidelity) last week, dutifully confirmed it once the issue had been priced on Wednesday night, and awoke Thursday to find ... nada. Zilch.

I had been passed over.

I wasn't alone in being shut out of the General's IPO. If media reports are any indication, lots of individual investors tried without success to get a piece of the government's favorite automotive pie. The IPO that was too soon, from the company that was too damaged, turned out to be more popular than anyone would have expected even a month or two ago.

For everyone who tried to buy a bit of the IPO and didn't succeed, the next question is the obvious one: Should they -- we -- buy GM's stock now?

Trying to value an enigma
The first step toward answering that question is to figure out what the company is worth, but determining GM's intrinsic value at this moment in history isn't all that simple. While guesstimating full-year sales and revenues would give us some food for thought, the multiple to apply to those numbers is very much an open question.

Why? Because this GM doesn't have much of a track record. The company's management team is still shiny-new. Will it be able to execute over the next few years?

Ponder these questions: How good will GM's 2014 models be? How well will they be marketed? How will they stack up against the competition? My answer to all of them is the same: Signs are promising, but the company's track record doesn't inspire confidence.

At the same time, GM has a few advantages over rivals like debt-laden Ford (NYSE: F  ) :

  1. A freshly cleaned balance sheet;
  2. At least a couple years' worth of tax advantages, thanks to a provision in the TARP program;
  3. A big share of the world's biggest growth market. (That'd be China.)

But Ford's product renaissance is at least a couple of years ahead of GM's, and it might be the understatement of the year to note that Ford CEO Alan Mulally and his team have something of a track record at this point.

Those promising signs
Still, there's lots of evidence that this isn't the old GM. Chief Financial Officer Chris Liddell, who came to GM from Microsoft (Nasdaq: MSFT  ) , says his goal is to have a "fortress" of a balance sheet, with minimal long-term debt and fully funded pension obligations. CEO Dan Akerson, a private-equity veteran, may lack Detroit experience, but his statements focusing on profit margins rather than market share represent a clear and conscious break from the General's old ways.

And it's not just management. New GM products like the Chevy Volt and Cruze are a far cry from the "good enough" cars from old GM. GM's best products are on a par with offerings from Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) and show that the company's product people really can deliver at a no-excuses level. Transaction prices (and margins) are up, and likely to rise further, and resale values are likely to follow suit.

It looks good and sounds good. But will it be good, two or three years from now?

I think the answer is yes, but because of GM's history, I say that with some hesitation. Still, while Dan Akerson's no-nonsense style might not be enough to drive radical cultural change immediately, I think the example of Ford's success might be:  GM's old litany of excuses just isn't plausible anymore, and everyone knows it.

Be greedy while others are still fearful?
GM's stock isn't exactly rocketing skyward as I write this on Friday, a day after the IPO. My sense is that investors, even sophisticated ones, seem to be having a hard time believing that new GM really is different from old GM. Sure, the latest batch of new products looks great, but won't the company be back to its old clueless arrogance any day now?

I don't think so, but that pessimism might make this moment a buying opportunity. At the same time, the historical record gives plenty of reasons for skepticism. What do you think? Is the new General Motors poised for success? Or is it the same old story, waiting to play out again? Scroll down to leave a comment with your thoughts.

Want to stay on top of GM's turnaround? Add the company to My Watchlist, which will find all of the Fool's analysis on the General's return (maybe!) to glory.

Fool contributor John Rosevear owns shares of Ford, which is a Motley Fool Stock Advisor pick. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (20) | Recommend This Article (17)

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  • Report this Comment On November 19, 2010, at 6:12 PM, RobVann wrote:

    When the ipo pricing was announced at 26 I bought Ford. When they upped it to 34 I bought some more. Today I noticed Magna and Tata down and bought on the dip. The Ontario and Canadian gov is still holding back a lot of shares..hope they don't take too much of a beating.

  • Report this Comment On November 19, 2010, at 7:04 PM, SmallWords wrote:

    Fool me once shame on you. Fool me twice, shame on you. Before the IPO, the CEO should have talked about the unfair treatment of the previous investors. Is this management team going to protect the interests of the investors or someone else?

    Once they answer that question, I will consider buying them.

  • Report this Comment On November 19, 2010, at 9:11 PM, wolfman225 wrote:

    One other thing to consider is the large chunk of GM that was given over to the UAW to help buttress their pension accounts. Now that "the help" is also "the man", it'll be very interesting to see how the union handles the inevitable conflicts that always occur between labor and management. I fully expect the rank and file to expect a rapid return to their glory days of unreasonably high salaries/benefits and to go up in flames when they are told, NO.

  • Report this Comment On November 19, 2010, at 11:51 PM, skypilot2005 wrote:

    John, I don't know how old you are but, I am going to give you the benefit of the doubt. First, management is going to take a slice of shareholder equity in the form of excessive compensation. Then, the UAW is going to take the rest of the equity. Shareholders are going to be left with nothing but their stock certificates. It may not be next year but, within 10 years, a GM investment will be worthless. I've seen this movie before. Many years ago, I bought GM in the 20s and sold at a nice profit. I never looked back...

  • Report this Comment On November 20, 2010, at 1:09 AM, njdo wrote:

    If you've been making cars for a hundred years you should know how to make them well and how to make them at a profit. You should rise to the competition and not be overwhelmed by it, yu should anticipate the market and not react to it. For all of these reasons GM should have been left to the inglorious pit of bankruptcy. They got bailed out because they had political clout and they intimidated paid off, servile, bootlicking politicians. I don't go to work and get paid so the incompetent boobs in DC who have always been asleep at the wheel while these catastrophes are happening can tax my earnings to bail out the subprime auto industry. Paying for my kids winter clothes is more important to me than subsidizing the lardbellies in Detroit. American politics gets more disgusting every year and the U.S. is heading off into the sunset of history as another failed nation like Germany, France or the UK. The bootlickers in DC care more about their pet financial interests than the they do about the long term economic health of the country. Its sad to see some Fools go along with this programmed mediocrity.

  • Report this Comment On November 20, 2010, at 1:54 AM, baldheadeddork wrote:

    @njdo - A little decaf, perhaps? (And btw - where do you do your banking?)

    John - I think you hit the nail on the head about GM being an enigma. There are too many unknowns for me to decide if it's a good investment at 33 - or 23 or 43. Someone asked in the thread of another GM piece if it was a value, growth or income investment and my immediate response was "speculative" because no one knows how it's going to fit into any of those three categories.

    As perilous as the last five years have been at GM, I think the next five are going to be even more important. They have to run an accelerated development schedule on everything just to catch up their product cycles. Money won't be a problem thanks to the bankruptcy, but bringing on hundreds and hundreds of new engineers and designers (and accelerating the development schedule for suppliers) can be a petri dish for quality issues. GM needs to get more new product to market than they have on the schedule now, but the cars aren't right it's not going to matter.

    I'm very skeptical about Akerson. The same praises about his background in private equity is the same cr@p I heard when Cerberus bought Chrysler. Being financially literate matters, but there's a clear history in the car business of companies doing best when either people from the engineering or marketing background are running the company. Making a finance guy the CEO usually doesn't end well.

    GM's marketing also leaves a lot to be desired. The Chevy "runs deep" campaign is awful - and it's not even the worst ads in that division. (That goes to the Dura and Max heavy duty spots.)

    They also need to develop a signature styling statement for Chevy. Buick and Cadillac styling is really good, but most Chevy models look like they were styled by Avis and Hertz. Compare the styling of a Malibu to a Fusion and the Chevy looks generic and cheap.

  • Report this Comment On November 20, 2010, at 7:31 AM, harleyguy wrote:

    Problem is, GM is not really about cars.

    It's really about other stuff, like taking care of unions, and retiree pensions, with a little car business on the side.

    GM's bankruptcy was not brought about by subpar products or brand mismanagement - it was caused by not making enough $$$ off the cars to pay for the all other stuff the company was burdened with.

    So what's changed to fix that problem? An electric car that is so expensive to build that the cost has to be subsidized by the gov't?

  • Report this Comment On November 20, 2010, at 9:18 AM, Ghellonwheels wrote:

    The is a $10 stock at best. The product is not there and a marketing will only carry it for a short time. Runaway!!!!!

  • Report this Comment On November 20, 2010, at 1:05 PM, baldheadeddork wrote:

    @ harleyguy: "GM's bankruptcy was not brought about by subpar products or brand mismanagement - it was caused by not making enough $$$ off the cars to pay for the all other stuff the company was burdened with."

    No, that is simply not true. GM went into bankruptcy because Rick Wagoner got GM into the mortgage business. Remember those easy loan ads for Ditech? That was GM. They were one of the largest subprime lenders in the US, second only to Countrywide during most of the boom from 2003-2006.

    When the housing market collapsed beginning in 2007, GM got hit with a fatal one-two punch. First, they begin to suffer huge losses from the Ditech/GMAC divisions that drained their cash reserves. And that caused a devaluation of their credit rating that made it impossible to borrow money.

    If GM didn't have a UAW contract or pension obligations for the last decade would have been irrelevant. If they had stayed out of the high-risk mortgage business they could have pulled through like Ford. But once they got in to subprime as deeply as they did, they didn't have a prayer.

  • Report this Comment On November 20, 2010, at 5:57 PM, dgmennie wrote:

    Hey, I like what baldheadeddork just said! This backs up my thoughts about what eventually does in most medium to big US corporations. Often they start out with a few great and original breakthrough ideas/products, get a solid jump on any competition, and grow like topsy, creating new markets and opportunities. But this original success and momentum are usually not permanent. Why?

    From my perspective, eventually the creative people with the ideas/vision leave or are driven out. The highly-paid executive staff that remains now becomes under great pressure to keep increasing profits to please Wall Street. So what do they do. They either LEND MONEY or SELL INSURANCE (sometimes both)! Probably the oldest business models in the universe, the basics (not the risks) understood by anyone who can work a pocket calculator, and "guarenteed" to generate huge profits...UNTIL!

    Yes, until the business cycle is interrupted by an "unexpected" turndown (bubble burst). Of course these wrenching reverses are not really a big mystery. They have happened repeatedly for hundreds of years and will keep happening on into the future. Smart corporations deal with turndowns by treating their creative people right and keeping the bean-counters on a short leash. Fail to do this and sooner or later "XYZ Corp" becomes just one more case on the bankruptcy docket.

    Only a select few from the corporate universe will ever be granted Government bailouts. And the jury is still out on the final result: salvation or just an expensive postponement of the inevitable.

  • Report this Comment On November 20, 2010, at 10:15 PM, SmallWords wrote:

    You're saying it was a case of Diworsification? I hadn't looked into that.

  • Report this Comment On November 21, 2010, at 12:03 AM, colibri2011 wrote:

    We fools are interested in proven, stable, long term, undervalued companies with great management and from all appearances a solid future.

    When or if GM ever matches the above description, I may give it a thought.

  • Report this Comment On November 21, 2010, at 12:49 AM, yousuck01 wrote:

    I would not go near this stock with my worst enemies money!!! Can you say please short until further notice!Fool us once ,shame on them,fool us twice shame on U.S.!!!Why should we have to bail ourselves out???

  • Report this Comment On November 21, 2010, at 6:44 AM, elliotriley wrote:

    I'll never buy GM shares. I have a long position in Ford, the only one of the two to have my respect.

  • Report this Comment On November 21, 2010, at 7:47 AM, prginww wrote:

    sdfsd

  • Report this Comment On November 21, 2010, at 2:27 PM, langco1 wrote:

    the only thing i like more than making money on a stock is doing my part to send the disgrace gm into bankruptcy for good...this comany will fail....

  • Report this Comment On November 22, 2010, at 8:44 AM, dragonarm wrote:

    GM is a lot like our governmrnt. The office holders come and go, usually based on some dim-witted, half-baked politial flavor of the week. However, the people who really make things work (and I use that term loosely) in the government are the bureaucrats that just stay and stay and stay. The management team may be new at GM but the people that really run that company are the same old gang of locked-in-the-box, uncreative morons that ran the company into the ground in the first place. GM is the most inbred company imaginable. Outsiders, when they manage to break into GM, are treated like aliens invaders and are generally relagated to positions of responsibility with no authority. Real power is in the hands of men with "grease" under their nails. Accountability is non-existant and they consistently just move non-performers to other positions in the company. The problems at GM go much deeper. They are rooted in years of thinking that produced a company that still thinks they are in the "car" business. They have failed to grasp the fact they are really in the transportation business. I, for one, would be hesitant to invest in the same old thinking. Better to await the time, if it comes, when we see real change coming from the bottom up rather than the same old "put a new coat of paint on it" and call it the next model year mentality that still prevails in GM

  • Report this Comment On November 22, 2010, at 12:42 PM, langco1 wrote:

    i believe fully that the disgrace gm will be forced to close for good in less than a year.after the way this company not only treated its last investors but its own dealers with their fake obama prepackaged bankruptcy there is no place left in america for gm or obama...

  • Report this Comment On November 23, 2010, at 2:13 AM, smokingminds2 wrote:

    does anyone give a thought as to, GM is the only company that has paid back and continue to pay back the money that the goverenment bailed them out with. Did GM send any of there people on vacations with the bail out money, as did the banks that were bailed out or the other companies. People are missing the fact that this country has been sending manufacturing jobs out of this country like handing out candy at halloween. The people in the US sit back and complain about bail outs but with no manufacturing jobs in a country the entire country is going to fail. We have taken God out of everything and and maufacturing out of the US. the very things that this country was built on we are now complaining about, and don't give a second thought to. When you talk about the big three, you are also talking about the thousands of people who have worked damn hard to try to save these companies in hopes that one day our children would be able to at least be able to have a job that would give them some kind of life. So where are our kids at now, and what kind of life are they looking at without manufacturing jobs. We need to produce something that these other counties want and we do not.Try to find something that is made in the US, GOOD LUCK.

  • Report this Comment On November 26, 2010, at 10:04 PM, liveoilfree wrote:

    GM is still lying, lying about its past failure, lying about its current lineup, lying about its future cars. Until GM at least comes clean about its past failures -- the GMT900, the Fiat Fiasco, the Rick Wagoner catastrophe, the EV1 debacle -- GM is still very much a L I A R.

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