The 3 Keys to Fixing GMhttp://www.fool.com/investing/general/2011/11/18/the-3-keys-to-fixing-gm.aspx Joe Magyer
November 18, 2011
Americans love a good comeback story. Since its IPO one year ago today, though, General Motors' (NYSE: GM ) tale has played out more like Boogie Nights than Rocky II. The CFO who marshaled the company through its IPO bailed in March, the company's European business is still floundering, and Uncle Sam is still sitting on his stake. The stock has tanked 36%.
Count me among the disappointed. I was bearish all the way down as GM cascaded into bankruptcy two years ago, but new management and a streamlined business changed my tune. And while I've been wrong about GM so far, I'm still convinced that both its business and stock are fixable sooner rather than later. The company has right-sized its cost structure, ramped up product development, gained market share, and centered itself around the four core brands of Chevrolet, Buick, GMC, and Cadillac.
Sources: Bureau of Economic Analysis and author's calculations.
GM has actually managed to turn a profit for the past seven quarters despite this tough slog, but lackluster demand is a pox on the houses of all automakers. That curse has pushed crosstown rival Ford's (NYSE: F ) stock down just as hard as GM's over the past year while foreign rivals Toyota (NYSE: TM ) , Honda (NYSE: HMC ) , and Nissan (Nasdaq: NSANY.PK ) have also underperformed the market.
The good news is that new vehicle sales should snap back thanks to an economic recovery and pent-up demand. The average age of cars on U.S. roads is now a record 10.6 years, according to Polk, as a tough economy has forced drivers to grind out just a few more miles on their clunkers. As those vehicles get more and more expensive to fix and used car prices hover near record highs, new vehicle demand will get pushed upward whether the economy comes along for the ride or not.
Step 1: Put the cash to work
The first is the most controversial: buying back half of the U.S. government's stake in the company. Uncle Sam is in a catch-22 when it comes to GM. It doesn't want to dump its stake at a loss, but the stock is stuck in neutral because many investors don't want to buy shares only to have the largest shareholder dump its shares shortly thereafter. An easy and actionable solution would be for GM to spend about $6 billion buying back half