Is General Motors (NYSE: GM) a goner? Despite the announcement of a major first-quarter miss, even we at The Motley Fool didn't rush to cover the news yesterday. Frankly, when confessed stock junkies don't really pay attention any more, you know you've got problems.
Problems are something that GM has in spades. In addition to significantly cutting earnings guidance for the first quarter (and all of 2005), the company announced that instead of expecting $2 billion in positive free cash flow for 2005, it's now expecting negative free cash flow of $2 billion. In response, the market sent the stock down to a 13-year low.
Ouch!
The problems at GM are legion. SUV sales are declining, and that's forcing the company to rely on less profitable auto sales. GM's cars generally remain overpriced relative to Japanese competitors (based on resale value), and the company continues to struggle with market share. What's more, GM has to increasingly rely on incentives and rental car fleet sales to move its product.
Worse still, Japanese makers such as Toyota (NYSE: TM), Nissan (Nasdaq: NSANY), and Honda (NYSE: HMC) aren't letting up, and smaller foreign players such as Hyundai (OTC BB: HYMLF) seem to be gaining some traction in the American market.
Many roads lead to how GM got into such dire straits. High retirement and health-care benefit costs have hurt, and many have suggested that the company is far too big for its own good and should take the lead of Ford (NYSE: F) in getting a bit smaller. Still others point to the company's apparent lack of "style sense" and of cutting-edge research in areas like hybrid vehicles.
So what now?
Some investors will no doubt see the company's $2-per-share dividend as a security blanket, while others might view the company's rock-bottom price-to-sales ratio as a sign of "value." I don't buy either argument.
With pathetic profitability and growth relative to companies such as DaimlerChrysler (NYSE: DCX), Toyota, or even Ford, GM deserves a rock-bottom price-to-sales ratio. As for the dividend, I frankly question how long GM can bleed out free cash flow and still maintain that level of payout in the face of huge debt and pension/health-care obligations. In other words, if business doesn't turn around in a year or so, that dividend looks to be in danger.
If someone figures out how to turn this behemoth around, the rewards could be considerable. Of course, the same could have been said about Penn Central, Bethlehem Steel, Eastern Air Lines, and so forth. I'm not suggesting that GM is heading for the big Chapter 11 in the sky, but I am pointing out that there really is no such thing as "too big to fail" anymore.
As anyone who reads my work regularly knows, I'm a sucker for deep-value turnarounds. But not all turnaround opportunities are created equal, and the key to making money is identifying the companies that really have a strong chance of coming back. Though time might prove me wrong, I just don't think we've seen the worst yet from General Motors, and I'm staying far, far away from this stock for now.
Philip Durell is also a sucker for deep-value turnarounds in his
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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