It's the poster child for American industrial decline. It's also the poster child for the controversial-in-the-extreme bailouts done by the U.S. government during the financial crisis.
Once one of the largest and most valuable companies in the world, General Motors (NYSE: GM ) isn't exactly drawing investors' attention these days. After all, the company collapsed in epic fashion after decades of mismanagement, got bailed out by the feds -- and then seemed, in some ways, to go right back to its old, broken approach to doing business.
But here's the thing: There's mounting evidence that GM really has changed, in ways that are increasingly visible where it matters, in showrooms and on the company's financial statements. Yet the stock price suggests that Wall Street either doesn't care -- or hasn't quite caught on to this story yet.
Does that sound like an opportunity to you? Read on.
This ain't your father's Oldsmobile … or Chevy, either
Ponder these figures, taken from GM's earnings presentation on Thursday:
- $39.7 billion of "automotive liquidity" -- the cash and credit GM has outside its in-house lending unit. Almost $34 billion of that is cash.
- $4.7 billion of "automotive debt," a minimal number for a global automaker.
- $10.8 billion in underfunded pension obligations. This was a huge concern at the time of GM's IPO, but the current total is down from $15.8 billion a year ago. It's still a concern, but it's one that is fading in importance over time.
And one more figure, taken from market data as I wrote this on Friday morning:
- A market cap of less than $38 billion.
Yep, GM's trading for a mere $4 billion over its cash holdings, despite minimal debt and a pension obligation that is coming under control. And despite this as well: Even though the economic picture remains murky, and even though overall auto sales remain far below pre-2008 historical norms, GM made an awful lot of money last quarter.
Why GM makes big money now
Friday's Wall Street Journal had a great chart showing how, even though GM is selling about the same number of vehicles that it did in 2008, it's making much more money per sale. As the Journal notes, a big part of that is due to GM's much-improved cost structure: GM shed a bunch of underutilized plants during bankruptcy and a bunch of labor-related costs in its last UAW contract.
But the Journal glossed over the other part of the story, and to my mind it's the key to the whole thing: GM can now ask and get a premium price for its vehicles because its vehicles are finally getting really good.
And that, I think, is the part of the story that many are missing.
The story Wall Street keeps missing
Automakers live and die by product. Cost control is extremely important, as are all the other business fundamentals, but if the cars aren't great the company's going to have to give discounts to sell them. That, right there, more than anything else, is the whole story of Detroit's downfall: Its automakers couldn't compete with Toyota (NYSE: TM ) and Honda (NYSE: HMC ) on quality, so they had to compete on price, and that plus their bloated cost base squeezed them (nearly) to death.
And now that Detroit's costs are down, the product is what's changing for the better. Product quality is the key piece of Ford's (NYSE: F ) much-touted renaissance: For the first time in decades, Ford has a full line of vehicles can compete with anybody. GM's product renaissance is a few years behind Ford's -- by which I mean, some of GM's products are at that level, while others are still awaiting improvements -- but the company is still able to get good prices, on average.
The bottom line
I've been a GM shareholder since shortly after the IPO, and I will be the first to say that GM is still very much a work in progress. GM's European operation is improving, but far from healthy; China will represent an ongoing challenge as well as an opportunity; and the coming wave of new cars and trucks has to be at least as good as GM's best products today.
There's more: CEO Dan Akerson is still a car-industry novice, and some of his moves have given cause for concern. The GM bureaucracy, although much reduced from its bloated heyday, still adds more time and cost to GM's product-development costs than I (and Akerson) would like. And critically, a "double-dip" recession could well drive sales and profits down significantly, at least for a while.
But with a market cap of less than $38 billion against a cash hoard of nearly $34 billion, a solid balance sheet, well-contained costs, and more and more products that are good enough to get premium prices, crazy old General Motors is looking more and more like a great value.
Keep up with the ongoing maybe-renaissance of the Detroit giant by adding GM and its key rivals to My Watchlist right now: