GM?

[natedogg]

Damn I posted last week thinking that autos might be a good sector considering how battered they've been. Ford and GM have skyrocketed this past week but will they keep it up?

GM's still a crappy company even with Kerkorian involved isn't it?

My guess is that the US automakers can turn around from where they are now. They have lots of advantages not the least of which is the anti-free-trade Congress we now have. They will almost certainly do something stupid like bail out the auto industry.

I'm also quite positive that the courts will rule in GM's favor when they seek to be absovled of their pension obligations, just like happened with Delta(?)....

natedogg

[player24]

Kekorian's $31 per share tender offer is the sole reason the stock has risen in the past week (big short squeeze). The tender places a floor under GM's share price in the near term. And Kerkorian may be able to effect a major resturcturing of the company which could unlock the existing liquidity ($20 billion of cash) and the asset value at GMAC. Stripping GM of liquidity and profitable assets (by distributing this value to shareholders) would be a radical move that would leave the automotive division in a state of insolvency. If you buy GM stock at this price (trading at 15x 2006 Street EPS estimates, average historical PE multiple is 8.3x) you are either betting on a successful Kerkorian resturcturing (although he is claiming that he is a long term investor (at age 87) with no such plans)...or you are betting on dramatic changes in the automotive business, from a cost and volume standpoint.

Unfortunately - GM production capacity represents about 33% of total capacity for the industry, yet the company's market share is about 26%. This seven points of excess capacity coupled with high unionized labor costs results in a cost structure that is high and highly fixed - leaving the company vulnerable to volume swings. The company has been steadily losing volume and market share (mostly to Toyota, Honda and Nissan - companies with low cost, nonunionized labor...good quality, low cost product...and far less reliance on large SUVs and pickups (which are losing share as consumer tastes shift and gasoline prices rise)).

The bottom line (if there is one) is that there are no visible signs that GM (or the US automotive industry) is recovering from its market share decline (and sales remain robust industry wide - what happens in a recession?). GM stock is expensive by historical standards and the recent runup is due to the actions of an unpredictable corporate raider. A government bailout, although unlikely, would be predicated on a sharing of the pain between workers, creditors and stockholders - and stockholders will not fare well (if you are long the stock at 31+, do not hope for this outcome). The only court that can absolve GM of pension obligations is a bankruptcy court - and we all know what happens to stockholders in 99+% of corporate bankruptcies. I'm not sure how to react to the contention that Congress is anti-free-trade (compared to what/whom?)

Now take the money you were going to use to buy the stock and go out and buy a Buick LaCrosse. Like the stock, the Buick sucks...but it will probably still be worth something in three years... /images/graemlins/smile.gif

[player24]

Bump...just to jump ahead of the Jesus post. Wrong forum.

[parttimepro]

Well said. GM is clearly in a death spiral. Its size and the likelihood of government intervention will probably keep it out of bankruptcy. Ironically, this will prevent it from making the kind of radical restructuring necessary to become competitive. It will continue to lumber on, zombie-like, producing expensively crappy cars and absorbing occasional government handouts.

[adios]

[ QUOTE ]
Its size and the likelihood of government intervention will probably keep it out of bankruptcy.

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My take is a little different. I think the automaking side of the business can be separated from the more valuable assets, I think we'll see the automaking side go into chapter 11 if for no other reason than to shed the UAW albatross.

[parttimepro]

You could be right, it depends on politics. Either way, it's a bad idea to buy right now for the medium- or long-term.

[scalf]

/images/graemlins/blush.gif..gm is socialism at its best

hey; maybe you are right;

or maybe you are kirk's long lost grandson..

lol

but gm even loses money at saturn..

they lose money at everything...

when interest rates go up; they are screwed

jmho

gl

/images/graemlins/grin.gif /images/graemlins/tongue.gif /images/graemlins/club.gif

[GeorgeF]

"I'm also quite positive that the courts will rule in GM's favor when they seek to be absovled of their pension obligations, just like happened with Delta(?)...."

This statment has no meaning to an investor. Delta shares have thus far been a bad investment for most people, even if they bought on lows. The bonds are a bit better as they yeild 25% so if delta pays for 4 years you are out of the red.

The thing to remember is that GM wants to keep current management, customers and workers happy. After that bond holders. Then retirees and then stockholders. GM is not thinking about what is best for shareholders, and bankrupcy courts will not even consider the interests of shareholders.

[ACPlayer]

GM convertible debt may be a better way to play a possible restructuring.

[midas]

I've said it before and I'll say it again - GM is not going bankrupt thus no restructuring. If they came close, the government would bail them out. Do you think Kerkorian would be buying stock if he thought they were going under? They need to sell some non-core assets like GMAC (non GM exposure), shake up management and start building cars that people will buy, not the junk they have been pushing on middle America for the past 30 years.

[player24]

[ QUOTE ]
I've said it before and I'll say it again - GM is not going bankrupt thus no restructuring. If they came close, the government would bail them out. Do you think Kerkorian would be buying stock if he thought they were going under? They need to sell some non-core assets like GMAC (non GM exposure), shake up management and start building cars that people will buy, not the junk they have been pushing on middle America for the past 30 years.

[/ QUOTE ]

So, do you think Kerkorian is buying the stock because he believes the Government will bail out GM...or because GM builds "junk" cars? When the Government bails out GM will they pay Kerkorian $31+ per share for his stock?

Why do you suppose Kerkorian needed to make a tender offer to acquire the stock? The stock is very liquid - he could have bought it in the open market at lower prices than $31 per share. Perhaps Kerkorian wanted everyone to know that he was buying stock? Perhaps Kerkorian already had a stock position and he knew a public tender offer would set off a a short covering rally and he would profit on his initial stock position.

Or perhaps Kerkorian thinks he can dividend GM's liquid assets (cash and GMAC) to shareholders and leave creditors holding the bag (the worthless auto division.) This sort of value transfer (bondholders to stockholders) is sometimes possible given the weak indenture protection in most investment grade bonds (weak restricted payment protection).

The government may be forced to backstop a portion of GM's pension obligation in a bankruptcy (via the PBGC). However, I can't imagine an investor "bailout" (which violates World Trade Organization rules, btw).

[midas]

I think Kerkorian bought the stock to shake GM into doing something greater than the status quo. Regarding his tender offer, the word might have already leaked that he was a buyer and he wanted to cap his purchase price.

I wonder if Buffet thinks that GM is a good deal? He loves buying into these situations, but may avoid if Kerkorian is already in.

[player24]

I think Kerkorian knew he was creating a short squeeze and that is what motivated the above market tender. No way he would have made the same tender if he hadn't already owned stock (which he acquired at much higher prices, btw.)

One scenario has someone like Berkshire Hathaway (Buffet) taking a partial ownership stake in GMAC. GMAC depends on GM for business, and vice versa. So it is unlikely that we will ever see a full separation of the auto and auto finance units.

BTW, Collins and Aikman is the latest US auto supplier to be on the door of bankruptcy. The CEO resigned today, and the company is guiding the market to much weaker performance.

Delphi, the nation's largest auto supplier is in the market trying to issue secured debt and the market is balking thus far. Delphi is burning enormous amounts of cash, has huge GM exposure, an underfunded pension plan and a 2006 debt maturity.

We have already seen a number of bankruptcies in the supplier sector, including Tower Automotive and Meridian. Many more to come.

As has been broadly reported, there is a contagion effect in the corporate bond market and a spillover into all capital markets. Many credit hedge funds are under pressure, but some of the recent reports have been exaggerated.

[DesertCat]

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I wonder if Buffet thinks that GM is a good deal? He loves buying into these situations, but may avoid if Kerkorian is already in.

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If you read Buffett's writings on the auto industry, you'd think he'd burn his cash before he'd stick it into an auto company.

Of course he's written similar things about airlines, and made a single investment in USAir fifteen years ago because the terms he was offered (convertible debt I believe) were so attractive. That investment turned out okay, but not until he suffered through several awful years where it looked like a terrible decision. He know claims to have a 1-800 number to call to talk if he ever gets the urge to invest in an airline again.

So what would it take for Warren E. Buffett to get interested in GM? He'd never be interested in the auto manufacturing part because of the huge capital requirements, as well as the poor cost structure. For example, Toyota has been attractive at times, but WEB has passed, probably because he doesn't like businesses that are forced to reinvest large portions of their earnings.

As the other poster said, he might be interested in GMAC, but I doubt he'd ever take a position unless it was spun out completely safe from pension and other claims created by the auto business. He'd also be wary of current management having any control over it since their capital allocation standards are among the worst in the country. And even if GMAC is spun out, it's price is likely to be too high for WEB.

You might see him buy small profitable subsidaries, or loan GM money through a convertible at usurious terms, but that's as close as he's likely to get.