At its current levels around $22 a share, less than five times earnings and down roughly 40% from its post-IPO high in January, General Motors (NYSE: GM) has recently looked to me like a major value opportunity. While the company is still best thought of as a turnaround work in progress, surprising progress has already been made. And there's more and more to like about current management's direction -- a story I continue to think Wall Street is overlooking.
But there's one big issue that Wall Street isn't overlooking: The company's pension obligation, which may -- emphasis on may -- be enormous, say some analysts. Are their concerns justified?
An unfortunate first-in-class for GM
GM is far from the only American company facing a pension shortfall. Bloomberg says 21 U.S. companies had a shortfall of at least $3 billion as of the end of last year, including AMR (NYSE: AMR) and ExxonMobil (NYSE: XOM) -- but GM's is the largest.
Exactly how large is unclear, though: GM's 10-K put the total global amount at $22.2 billion as of the end of 2010, and the company recently said that its U.S. plan was underfunded by $10.8 billion as of June 30. It's possible that continued low interest rates and an unhappy stock market have made things worse since. Analysts interviewed by Bloomberg suggested that the global total could exceed $30 billion by the end of this year -- approaching, or maybe even exceeding, GM's total market cap.
That sounds dire, especially for a company with a decades-long history of financial mismanagement on an epic scale. Is it?
It's bad, but ...
It's true that GM is not even the only automaker seeing a growing pension shortfall -- one analyst recently estimated that rival Ford (NYSE: F) could see $2.2 billion added to its liability by the end of this year. That'll be a nuisance for the Blue Oval, but if analysts are on the mark, GM's exposure is way beyond nuisance level.
But should it be dire enough to keep GM trading at a multiple that's half the historic norm for this sector, despite solid profits and growing sales? I think that's an overreaction that will be corrected in time. Here's why:
- GM has a ton of time. GM Vice Chairman Steve Girsky recently pointed out that the company won't be required to add funds to its U.S. pension plan until 2015. Investment gains between now and then could greatly reduce, or even eliminate, GM's liability.
- GM has a ton of cash. Even if the liability turns out to be huge, GM can almost certainly cover it: The company has nearly $34 billion in the bank, even after putting $4 billion into the pension plan in 2010 and another $2 billion so far this year.
- GM's management is on the case. Despite the lack of an urgent deadline, when speaking to analysts recently, Girsky said the company wants to "take the pension risk off the table." GM's current managers are determined to "de-risk" the company from a financial perspective, and they see the pension exposure as a major risk. Expect them to act aggressively in coming months.
This may represent an opportunity
Here's the upshot: It's a concern, but I think GM's leadership can and will take care of it. This isn't the GM management of old, with lackadaisical financial controls and a blind it'll-all-be-fine attitude. CEO Dan Akerson may still be learning the nuances of the auto business, and is a little overfocused on benchmarking Toyota (NYSE: TM), but there's no doubt that the man can read a financial statement. Meanwhile, CFO Dan Ammann and his predecessor, Chris Liddell, have whipped GM's once-ragged financial reporting systems into shape. From a financial perspective, GM is finally under tight control.
GM's leaders haven't quite come out and said it explicitly, but my sense is the whole point of holding that huge cash hoard is as a hedge against the worst case scenario with the pension funds. If so, that's exactly the kind of financial discipline GM has needed -- and another reason to think that this famously ill-managed industrial giant may finally be on the right track. You might have to wait awhile to see a dividend, but current prices look to me like a nice opportunity.
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