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The Market Is Wrong About GM

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Share prices are down, incentives are up, and domestic rival Ford (NYSE: F  ) beat General Motors (NYSE: GM  ) in monthly sales for just the second time since 1998. Amid all that unhappy evidence, investors are skeptical of GM's prospects. But they shouldn't be.

While the media have given favorable coverage to GM's new CEO Dan Akerson, some industry insiders harbor far less kind opinions. Akerson's recent comments about GM's business strategy evoked comparisons to loathed former CEO John Smale and the old GM's failed sales-at-any-cost approach. Share prices have languished below November's $33 IPO price for most of March. Clearly, the market isn't sold on the "Government Motors" story.

However, a closer look at GM's moves leads me to believe that the market is wildly underestimating its chances. Take yesterday's late-breaking news that GM sold off its stake in Delphi, pocketing a cool $3.8 billion in the process. With another $1 billion raised earlier in the quarter from the sale of preferred shares in Ally Financial, GM's $4.8 billion war chest should go a long way toward strengthening its balance sheet. Not satisfied simply having a net cash position like Ford's auto division, GM promised us asset sales in a push toward becoming debt-free, and it looks like the company's well on its way.

Part of the negativity surrounding GM relates to the disaster in Japan. Considerable uncertainty remains over what parts GM sources from Japan, whether the earthquake and tsunami affected those factories, and whether procuring alternate supplies will prove difficult. Production was suspended for a couple of days at the company's Shreveport, La., plant because of an unnamed part shortage. But even if the shuttering had persisted, the facility's Colorado and Canyon trucks are low-volume vehicles, accounting for only a negligible amount of overall production.

For Japanese automakers focused on "just in time delivery," the quake is a lot grimmer. Dramatic photos of destroyed vehicles ready for export have begun to surface. Nissan was forced to close five factories. Honda (NYSE: HMC  ) suspended all Japanese production, costing it 4,000 units per day. Toyota (NYSE: TM  ) lost production of 140,000 vehicles, and another half-million may be delayed. On the domestic side, things are different. Both Ford and Chrysler are limiting orders of certain color paint jobs, but for the most part, U.S. production remains unencumbered. Investors shouldn't dismiss the risk of supply disruption, but fears of mass shutdowns appear overblown.

Speaking of overblown, there's no rational basis for fears that GM management might drive off the incentive cliff in a vain attempt to hit aggressive sales targets. Yes, incentives were high, and they ramped up at the beginning of the year. But that was part popular loyalty program and part sales mix, specifically strong Cadillac sales. Thanks to the higher per-unit price, the luxury vehicles carry higher incentives. As my colleague John Rosevear highlighted, incentives should be down by $700 for March. With capacity utilization in the 90% range, and the company's lowest inventory levels in two and a half decades, I would expect that trend to continue until GM reaches the industry average.

Finally, GM is cheap on pretty much any basis you can come up with. The company's forward P/E is nearly half of the industry average, and even on an EV/EBITDA basis, GM puts in a good showing, especially against the five-star CAPS rated Tata Motors (NYSE: TTM  ) .

If you don't own shares or just started building a position in General Motors, now looks like a good time to be aggressive. For investors who already own a sizable position, GM may not have dropped enough to double down, but it certainly deserves close watching.

Keep both hands on the wheel and your eyes on the road, and follow General Motors on your free My Watchlist page.

David Williamson owns shares of General Motors. General Motors is a Motley Fool Inside Value pick. Ford Motor is a Motley Fool Stock Advisor choice. The Fool owns shares of Ford Motor. Try any of our Foolish newsletter services free for 30 days. 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 (19) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2011, at 4:01 PM, tomwittmann wrote:

    1) The comments regarding that FORD outsold GM

    in March are totally moronic, In January, GM had fpr special reasons a extraordibnary spile, Ford by the contary a relatively modest result, Now, in March, this was compensted, not even totally,

    So what the hell mean all these comments??

    2) Further, a second "moronism" are the comment regarding Japanese parts. Polls have already shown that even if a certain type of car suffers unavailabilty for a few weeks,the sales would not suffer.

    There could be a modest cost increase in the factories due to the disruptions

    Of course, this is valid for the US companies.

    Japanese companies diruption will be much larger, including the US assembled, which by the way will show that their US components are much smaller than touted (as many of these are only screwed together, even only packed,in the US

    The impact in Korean cars will be more than in the US companies, but less than in the Japanese.

  • Report this Comment On April 01, 2011, at 4:03 PM, JPG101 wrote:

    GM will be bancrupt in 4 or 5 years...

  • Report this Comment On April 01, 2011, at 5:10 PM, phoebe44 wrote:

    Let us not forget that GM took the tax payers to the cleaners on the way to being debt free laughing all the way to the bank and Ford chose not to do that.

    I don't give a flip how great GM's balance sheet looks, is going to look or will ever look - shame, shame on them. They have always and will always rest on their greedy GM laurels and they won't get another red cent of my money.

    They can never pay back their bail out as it keeps compounding and they tax payers they robbed retire or die -

    Ford is the man!

  • Report this Comment On April 01, 2011, at 9:22 PM, mzllrc wrote:

    GM continues to under perform in all aspects of the business, sales performance, quality, and profit.

    Bottom line GM stock is down since the IPO, down 5%.

    While Ford stock is up 21% during the same time period, Ford's quality is industry leading (rated better than all), market share is up and profits are at record levels.

    GM is still GM, nothing at GM has changed since BK. While Ford continues to be on a roll.

  • Report this Comment On April 02, 2011, at 12:54 AM, shoemaker17 wrote:

    why did Ford not take bailout money? Maybe because the Ford family still had quite a substantial stake in the company. If the two others had not taken the money and were allowed to fail, it would have been the end of Ford too. They all have similar parts suppliers who would have gone belly up if GM and Chrysler didn't ask for the bailouts. This would have affected Ford, but fortunately for Ford, they were able to survive and spin it in a way that shows they were more responsible.

  • Report this Comment On April 02, 2011, at 2:11 AM, baldheadeddork wrote:

    Ah, where to begin?

    GM's balance sheet isn't the problem. Thanks to bankruptcy to clear the debt from their books and a massive reduction in manufacturing capacity, they are poised to be very profitable for the next 2-3 years. Selling their holdings in Delphi and Ally is the proverbial cherry on top.

    But money can't buy time, and that's a big problem for GM. They lost three years on their product development cycle from 2007-2010 because the company simply didn't have the money. New models were pushed back a year or more, or cancelled outright. GM's full size truck (not the super duty) dates back to 2007 and it shows compared to the newer F-series and Ram. It won't be replaced until the 2014 model year, seven years after it debuted. It's the same story with the Malibu midsize sedan.

    So while GM is going to make a lot of money on the top line, they're going to be spending a lot more than the competition on R&D for the next five years as they race to catch up while not letting the current good products like the Cruze and Traverse grow stale. And even though they have this money and have gone on a hiring spree for engineers and designers, it still takes three years to get a new model into production. My semi-informed estimate says it will take until the 2016 model year for GM to get back to a normal product cycle.

    Playing catch up on product development will hurt profitability on the dealer lots, too. Manufacturers with older models need to spend more on advertising and incentives to move their cars. What we saw in January and February is going to be the exception instead of the rule.

    "Speaking of overblown, there's no rational basis for fears that GM management might drive off the incentive cliff in a vain attempt to hit aggressive sales targets."

    What? This makes me think of the line about are you going to believe me, or your lying eyes? GM can spin it any way they want about loyalty programs and big incentives for Cadillac, but the numbers don't lie. GM has consistently spent 25-33% more than Ford on incentives for the last couple of years and they're rushing back into subprime financing. They're also shoving a record number of cars onto dealer lots - stuffing the pipeline, it's called.

    All this is raising eyebrows among long-term industry followers because it's evidence of the New GM falling into the worst habits of the Old GM. They are buying market share with incentives instead of maximizing profitability on each vehicle even if it means giving up some market share.

    I think if you take a step back and look at GM it shouldn't be surprising that they're falling into old bad habits. They've had four different CEO's in the last two years and the management chaos has filtered down to the divisional levels. Whitacre is turning into a disaster. He's setting finance people against car people in the worst of GM's past and running the company with an outsider's arrogance that is alienating the people who created the good cars GM is making now. He's also indicated he's not long for GM either, so we get to see another regime change probably in 2012. I'd bet it happens before this time next year.

  • Report this Comment On April 02, 2011, at 2:34 AM, Tuxster12345 wrote:

    You'd have to be a FOOL -- not a Fool -- to put money into GM.

    Fool me once, shame on you. Fool me twice....

  • Report this Comment On April 02, 2011, at 2:37 AM, Tuxster12345 wrote:

    Surely, you aren't being a kickback for pumping this stock, no? Motley Fool prides itself on telling its fan to follow the cash always and that "cash is king" and that cash if the lifeblood of any company.

    So, why are you pushing Las Vagas Sands (LVS)?

    A cursory glance at some of the company's cash metrics tell the tale.

    Over the trailing 12 months the company reported $0.42 earnings per share. However, when you count the CASH -- using Buffet's version of free cash flow (i.e., "owner earnings") -- over the same period, the company LOST $0.88 per share.

    So, which is it?

    Is there a cash profit or not?

    At least for the past 12 months, the answer is clearly no.

    Also, calculating the company's "burn rate" tells me the company will run out of cash (i.e., working capital) in a little less than 2 years. And, please, don't even get me started on the company's debt load.

    Las Vegas Sands is certainly a no-can-do kind of company for me.

  • Report this Comment On April 02, 2011, at 8:07 AM, skypilot2005 wrote:

    David Williamson wrote:

    "However, a closer look at GM's moves leads me to believe that the market is wildly underestimating its chances."

    How about the UAW contract that is up this summer? I am surprised your analysis doesn’t mention that. This is the second article recently at The Fool that fails to mention the possible effects of the UAW on future labor costs at GM in the next say, 5 - 10 years. By that omission, I wonder if you are competently analyzing the company’s future for long-term investors.

    I won’t address another concern: Future executive compensation and raids on stockholder equity. Let’s ignore history, for now.

    In that light, maybe the market IS right unless you are a Day Trader. Fool On.

  • Report this Comment On April 02, 2011, at 10:51 AM, buffalonate wrote:

    I like GM and Ford. Both have better looking cars and trucks than Honda and Toyota do now. Honda and Toyota used to have amazing looking cars 3 or 4 years ago but now they are really boring looking. The union sounds willing to go to a bonus structure which will protect the company during downturns.

  • Report this Comment On April 02, 2011, at 1:04 PM, warrenrial wrote:

    Ford has beat Obama Motors in sales and will continue to do so. Go Ford.

  • Report this Comment On April 02, 2011, at 2:32 PM, TnFlash2u wrote:

    If GM follows Ford's lead and gives tens of millions of dollars in bonuses to their CEO it means they did not learn a thing about how to keep a company profitable.

    I sold my Ford stock yesterday when they awarded their CEO 28 million on top of his 1.4 million salary. I will do the same with GM if they do the same thing.

  • Report this Comment On April 02, 2011, at 4:23 PM, baldheadeddork wrote:

    @skypilot2005: "How about the UAW contract that is up this summer? I am surprised your analysis doesn’t mention that. This is the second article recently at The Fool that fails to mention the possible effects of the UAW on future labor costs at GM in the next say, 5 - 10 years. By that omission, I wonder if you are competently analyzing the company’s future for long-term investors. "

    It's because the macroeconomic effect of the new contract isn't going to be that great.

    The big three had two big problems with labor costs prior to 2008: First, they had a huge amount of excess capacity and the old contract allowed for 12,000 laid off workers to be paid close to full salary. This was the job bank system that the automakers created with the UAW. The companies agreed to it because it was still less expensive than keeping unproductive plants or shifts working, and it kept the trained workforce intact under the belief that most of the workers would eventually be called back - as had happened in most cases for almost 40 years.

    But beginning in 2006 all of the big three began to permanently reduce their capacity with buyouts, and the job bank had to go. It did with a contract amendment in 2008. That cost is now gone.

    The other big labor expense that hit US automakers disproportionately was the cost of retiree health care. That is now gone, too. In 2007 the UAW and Big Three negotiated a transfer of responsibility for retiree health care from the automakers to the UAW. It is now totally off the books of all three.

    The last big issue is the tiered wage system for new hires that went into effect a couple of years ago. The UAW has said in the last couple of weeks that they are not going to fight to remove that in the contract negotiations.

    Hourly labor costs for the big three are now in line with non-union plants, and the UAW hasn't made any overtures about going back to the old system. The big issue is going to be profit sharing. Last year 40,600 Ford hourly employees received $5000 profit sharing checks, which combined amounted to just 3.625% of Ford's profits. They are going to want a bigger piece of that pie, either in cash or through a stock plan.

  • Report this Comment On April 02, 2011, at 4:35 PM, willadd9 wrote:

    It is sad to do like Kmart and GM did to their former investors. Us little guys now own worthless paper and they get to go on as if nothing happened. Then for GM to give out bonuses higher than ever! What a kick in the pants to boot.

  • Report this Comment On April 02, 2011, at 7:41 PM, Baron0602 wrote:

    Great April Fools joke. Keep up the good work.

  • Report this Comment On April 03, 2011, at 12:11 AM, TaoOfPatrick wrote:

    Politics isnt my thing,But doubling my money is.Gm third largest position and foolishly will be counting my profits in 5years or less!

  • Report this Comment On April 03, 2011, at 6:10 AM, woodyo43 wrote:

    I hope this GM call is an April Fools Joke, if not I question my subscription and any other call.

  • Report this Comment On April 03, 2011, at 12:08 PM, theseer0 wrote:

    Dear Mr. Akerson,

    While I am delighted that General Motors is turning a profit, and that the US government is being paid back its loans in a timely manner, and that management has made some of the difficult changes needed, your relationship with its investors still needs improvement.

    Hundreds of thousands of the American public, most of whom were staunch supporters of the Company, and buyers of your cars, bought medium and long term GM bonds to fund their retirements and their everyday expenses. They believed in you. Yet, in a bankruptcy that was not a real bankruptcy, your company simply shed this $27 billion of debt while retaining all of its plants, its personnel, its markets, its union favors, and indeed everything that was GM.

    GM did over $110 Billion of sales last year. The $27 Billion of bond debt stretched until the 2040’s, effectively over 30 years, representing about $1 Billion per year. This is less than 1% of sales. It would be the honorable thing to do to reinstate this honest bond debt, pay the $1B per year and in doing so, gain such favor in the bond market that GM would be able to issue another $30-40 Billion of long term debt. At present, the repudiation of the past GM debt has so poisoned the investing public that any real bond offering is scrutinized with a jaundiced eye.

    Reinstating the bond debt would also free up the 10% of stock of that GM allocated to it, an immediate gain of $5 Billion for a current $50 Billion company valuation.

    I have no doubt that doing the honorable thing would generate goodwill (and higher worldwide sales) far exceeding its immediate cost, and would, in a short time place GM as an investment grade holding once again, a major financial gain.

    Try to look beyond the next quarter if you can.


  • Report this Comment On April 03, 2011, at 12:48 PM, atthelakejim wrote:

    If only GM had a business plan that didn't depend on the government to pump money into its coffers. If only GM had a plan to build cars that really compete in the auto world. If only GM had the had the manufacturing capability to build cars that were reliable and had the features that people want.

    For years I drove nothing but GM cars because they were stylish, reliable , and competitive. If only today's models were.

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