Is General Motors a Screaming Buy?

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:

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Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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 (11) | Recommend This Article (4)

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 August 06, 2011, at 6:44 PM, belseware wrote:

    No.

  • Report this Comment On August 06, 2011, at 11:29 PM, baldheadeddork wrote:

    John, what do you think about GM's revolving door executives? Akerson is the fourth CEO in the last two years and there have been at least two turnovers for all of the division heads. I don't think it's done yet. Akerson is practically screaming that he's not in for the long haul and if/when he leaves there will be the biggest upheaval in GM's upper management yet.

    I think a big part of GM's fate will be decided by what happens with Toyota over the next five years. Of the automakers who have gained the most from Toyota's stumbles, I think GM is clearly the most vulnerable to give it back if Toyota has a strong resurgence. Right now I think GM has slightly better odds, but if you're looking to buy GM you have to consider Toyota's future as an x-factor.

    With the dip, I still think Ford is a better and a safer buy. I'm not going to be surprised at all if F gets back into the high teens within the next year. For GM to do as well it would have to hit 45.

  • Report this Comment On August 07, 2011, at 11:09 AM, richard10012 wrote:

    I would not buy a GM product or the stock no matter what the value seems to be.

    I have value and after what Obama did to the prevous stock holders for the sake of the unions but lied to the public as to why he was doing it, I never will participate in the product or the stock.

    There is more to life than making money. I would get more satisfaction if the unions and GM went under...their cars and retirements.

  • Report this Comment On August 08, 2011, at 4:50 AM, TaoOfPatrick wrote:

    I've been a fool with GM,and i don't mean that in a good way!

  • Report this Comment On August 08, 2011, at 4:53 AM, TaoOfPatrick wrote:

    Thanks richard 10012 for helping this poor ole UAW and Fool member.You and Obama will always be in my DEBT!

  • Report this Comment On August 08, 2011, at 9:54 AM, TMFMarlowe wrote:

    @baldheadeddork: It doesn't worry me all that much today, though that could change again. I would place a small bet that Reuss ends up being the long-term guy after Akerson, and I think he's a couple more years of seasoning away from being the right guy. He's a car guy who seems to be really good at the business end of things, and I think that's the kind of guy who really should be running GM post-turnaround.

    But we're not post-turnaround yet, and the current regime still gives me pause. Akerson seems to have done well at increasing the company's tempo and keeping its focus beyond the Detroit (or Dearborn) city limits, but I keep hearing little anecdotes about some of his blind spots (the guy totally doesn't get the importance of performance cars at a brand marketing level, for instance, and he had to be schooled on lots of basic powertrain stuff from a biz perspective -- yes, GM really does need to make their own engines, Dan) that show up his lack of industry knowledge. And that Detroit News interview was... entertaining, but not in a good way. Still, he's not a dumb guy, and he's learning.

    Somewhat to my surprise, I think Amman is doing okay as CFO and could well hold down that role for many years. He is one who is clearly benefiting from Akerson's experience and leadership, and having that influence in the CFO slot long-term could be quite good for the business.

    Long story short, I think they're a couple of years and one more big step away from being in a solid long-term situation, and I'm warming to the idea that Akerson can carry them there. Ford is definitely in far better shape in the C-suite and on the showroom floor, but to me that's part of the appeal of holding GM right now.

    John

  • Report this Comment On August 08, 2011, at 11:52 AM, prginww wrote:

    You ignorant fools that bash GM for what the bankruptcy judge did need to get off GM and blame the government. GM had a CEO in place that said NO BANKRUPTCY and when he went to the government for a loan they told him only if you step down so for the good of the company he did.

    But what really makes me mad are you people that say you will never buy GM but you use a bank that took bailout funds. GM was turning the corner before the financial collapse but the banks are what put GM and Crapsler into chapter 11 protection. Ford would have needed it had they not been in worse shape sooner and got lucky enough to borrow before the markets froze up. Ford did take low interest loans from the GOvernment so dont go thinking they didnt get anything. Even Toyota needed a bailout from the Japanese government although so save face it was given to Toyota Motor FInance.

    Stop being hypocrites. If you hate what happened with GM and wont buy a GM then get rid of your bank too because they did the same thing if not worse than GM. They lost your money took bailout funds then turned around and raised your fees when they would have to answer to the government and forced you to pay back taxpayer money with your money. Dont you feel like a fool now?

  • Report this Comment On August 08, 2011, at 11:56 AM, prginww wrote:

    WHat does Ford have thats good?

    Lincoln is garbage and needs redesigned badly. Beyond that you have the Focus and Fiesta (Both made in Mexico), the Taurus, f-150, and Exploder.

    GM has Cruze, Sonic, Volt, Malibu (2013 model in Jan), Equinox, SRX, CTS, LaCrosse, Regal, Verano.

    GM isnt behind Ford one bit. ANd financially dig deep into Fords books and you wont like what you see. On the books the stock is still worth NOTHING! They have more debt and accrued expenses than cash and receiveables. A double dip recession would put Ford into Chapter 11 protection.

  • Report this Comment On August 08, 2011, at 12:39 PM, exgmbondholder wrote:

    First day performance, DOWN 6%! Nice call. I hope no one listened and took your advice.

  • Report this Comment On August 08, 2011, at 2:29 PM, exgmbondholder wrote:

    Are you screaming yet?

  • Report this Comment On August 09, 2011, at 10:11 AM, TMFMarlowe wrote:

    @exgmbondholder: This article was written and filed on Friday before the S&P downgrade, but the market-wide drop on Monday just makes my argument stronger. Ford looks like a good buy here too, though for both Ford and GM the larger question is whether auto sales (or at least margins) will be under pressure in the next few quarters.

    @realtechwiz: You're comparing apples to apple seeds. The Focus is made in Detroit, not Mexico. The Fusion is top-notch, as are the Taurus, the Explorer, the Flex, and the post-refresh Mustang. Meanwhile, on the GM side of the house, the Sonic, Verano, and new Malibu aren't even in production yet, the SRX needs better powertrains yesterday, and the CTS's interior refresh is already a year overdue. GM's product line will get there, but not for a few years -- which is part of why the stock is an intriguing buy right now.

    John Rosevear

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