How to calculate EV of this proposed investment?

[player24]

Q: Why buy a preferred stock with a lower yield and higher dollar price than bonds of the same issuer which have a comparable maturity?

A: In most cases, you should demand much greater compensation for owning the preferred stock of a high yied company. Your investment in preferred will recover much less than the bonds in a bankruptcy.

But: This case is somewhat unusual. The security being referenced has a bond indenture (contractual coupon payment) and is pari passu with GM senior unsecured debt.

However: This security is not "true" preferred stock. If it was, it would be yielding much more than the debt.

And: The stock looks remarkably expensive versus the debt. The best GM trade is to short the stock and buy the bonds in an appropriate ratio (currently about 2.5:1). You will gain under nearly any scenario - the one exception being if the stock rallies by more than 50% in the next year. GM does not deserve a $15 billion equity market capitalization.

Finally: GM is not too big to fail. A bankruptcy won't put the company out of business (probably). Most large corporate bankruptcies simply transfer the ownership of the company - debt holders become equity holders...and equity holders become dust. Preferred can recover more than common equity, but the difference is often small. The US economy is large and diverse - don't expect Congress to act to protect GM creditors and equity holders.

[midas]

Spoken like a true hedge fund guy!

FYI - GM is too big to fail, similar to Chrysler, the U.S. gov't would never let GM declare bankruptcy - the ripple effect through the U.S. economy would be severe - can you imagine GM saying to all its suppliers - sorry I can't pay!!! Bankruptcy for everyone!!!

[RedManPlus]

Kirk Kerkovian disagrees with you.
He thinks that the finance unit alone is worth $30/share...
And you get the car business for free.

Actually...
I don't "buy" stocks... I only trade them.

Today I made 85 trades...
41 in GM "bond equivalents" and 6 in Ford "bond equivalents".

All I want is more car stock volatility.
I don't care if they go up or down.

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[adios]

Nice posts guys. From what I understand Kerkorian is long at GM at around $25 and offered to buy more at $31 even though GM was trading for less. Supposedly shorts including the hedge funds that are doing the long bond and short stock trade Player24 mentioned have to start covering due to Kerkorians bid. Perhaps this is a way for Kerkorian to sell and make a decent short term profit. I guess Kerkorian made a killing on Chrysler way back when though.

FWIW the UAW liabilities that GM has seems to be killing them. I'm wondering if a chapter 11 would be a way to lessen those liabilities.

[player24]

[ QUOTE ]
Kirk Kerkovian disagrees with you.
He thinks that the finance unit alone is worth $30/share...
And you get the car business for free.


[/ QUOTE ]

The finance company may be worth $30 bucks per share (although I think this is a bit of a stretch, $25 is my estimate). However, "free" is too expensive for the auto company.

The auto unit has a $96 per share liability for Pension/OPEB and net debt of $5 per share. Assuming gross automotive assets are worth $101 per share, then GM stock could be worth $25 to $30 per share.

Maybe Kerkorian can unluck the finance unit value before the automotive operations burn more cash, lose more market share and negate all of the value of the finance unit? Operationally, GM is a sick puppy...and I don't think management gets the joke (yet).

In the near term, I won't fight the tape. Kerkorian caught the shorts leaning. (He could be selling his stock today - or he may think he can influence management to begin to liquidate the company.) I don't think that Kerkorian is going to improve GM's SUV sales.

Longer term, I will bet on the fundamentals - which are decidedly negative with no turn in sight. Restructuring this company is going to be a long and painful process.

[meow_meow]

[ QUOTE ]
Kirk Kerkovian disagrees with you.
He thinks that the finance unit alone is worth $30/share...
And you get the car business for free.


[/ QUOTE ]

Yeah, GMAC makes lots of money. Too bad it's bundled with the car business, which loses lots of money. I don't want the car business for free.

[natedogg]

This sounds very fishy. Why is he pushing this risky bond onto you?

Try researching Canadian Royal Trusts. They are oil and gas interests that pay huge dividends. Hell I just found a US stock NGT that pays a 9.2% dividend. It is a natural gas trust.

There are european utilites that pay close to 10% dividends too. There's LOTS of ways to earn close to 10% with MUCH less risk.

At least with a gas trust you know people want to buy gas. I don't know what this company is but it sounds fishy the way its being pushed onto you. I would CERTAINLY not put a significant portion of your investments into a single company's junk bond. A junk bond FUND is scary enough.

natedogg

[RedManPlus]

There is no free lunch.

Any stock yielding around 10%...
Either has significant default risk...
Or the dividend is not sustainable and will be cut.

So you have to dig a little deeper.

It takes about 3 minutes to check out NGT via Yahoo.

They change the dividend amount each quarter...
So a yield calculation based on the last payment is misleading.

In the last 12 months they've paid out $2.02...
And they've earned $2.04...
So NGT's yield is actually about 7.5%

And this is not risk free.

You are also exposed to the volatile energy sector...
And after Enron and friends...
God only knows what really goes on with some of these energy companies.

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[adios]

[ QUOTE ]
Any stock yielding around 10%...
Either has significant default risk...
Or the dividend is not sustainable and will be cut.

[/ QUOTE ]

Have to disagree here with this statement. When a company pays out nearly all of it's earnings as dividends which is the case for almost all the CanRoys, the yield should more or less represent the risk premium that investors demand for a stock. ERF has been around for a long time and I think over the past 15 years or so with dividends re-invested it's far outpaced the market. Buying CanRoys is a play on the price of Oil and Natural Gas for the most part as well as play on the Canadian $ vs. the U.S. peso. CanRoys differ from there US counterpart AmRoys in that CanRoys can acquire additional energy assets while the assets for AmRoys are depleting. Are CanRoys highly leveraged? You betcha thus the higher yields. Also if one wants to really trade the CanRoys you probably should get a broker where you have access to the Toronto exchange.

Some of the best analysis of CanRoys, energy companies, and high yielding stocks that I know of can be found at ValueForum.com. It costs about $100 a year for to have full access to the site but it's well worth it.

[RedManPlus]

You just proved my point.

In order to get a 9.3% yield...
And possible capital appreciation...
You have to make a "play" or bet or gamble...
On the price of oil... plus currency risk.

ERF tanked by 25% in the wake of Enron...
And tanked about 20% in the spring 2004 bond swoon...
And has recently lost 15% in 2 months as crude slid.

I've traded "bond equivalents" for a living for 10 years now...
And there is no free lunch.

You never, ever get a 10% yield with a AAA risk profile.

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