Bull/Bear Report: Should you put the brakes on GM?
There sure has been a ton of destruction in the market this year. A credit crisis, high oil prices, and a recession have conspired against stock values. It would appear that no sector is immune to the carnage although some are getting hit much harder than others. One space that has been absolutely crushed this year is the auto manufacturers with the American companies, General Motors (GM) and Ford (F) leading the way down. It should be no surprise given the emphasis on gas guzzling trucks and SUV's, but to lose market share to foreign car makers makes the current state all the more troubling. All of this could have been avoided with a little planning. Oil has been rising steadily for many years and yet neither GM nor F made any effort to transition to higher fuel economy vehicles or alternative vehicles. Ask Toyota how they feel about making their hybrid car today. They are laughing all the way to the bank. The demise in Detroit has been of epic proportion, but maybe that is the time to get interested.
I made GM our stock of the week after having a great discussion about the company in our InvestorPlaceBlogs chat with Jim Jubak (read a transcript here). While it is fashionable to bash the company, it very well may be a good time to buy. From my perspective the opportunity to compete with a line of vehicles that the market seems hungry for will be just the right tonic for GM. The bad news is out of the way and things can only get better. Or can they get worse? Indeed, without a successful turnaround the company may very well blow through the remaining billions of dollars of available capital. That seems a stretch to me as the company has appeared to endure the worst of it. That capital base should help the company turn the corner to a new era of car making. Lower operating expenses should help as well. I would be a buyer of GM at current levels, but what do you all think.
Read on for two opinions on GM from our bloggers.
The Bull Case - Don Barrett
General Motors and rival Ford have been the leaders of the pack for many years, but is the glory run over? GM entered the 1970s as the leader in car sales and the 70s may have very well been the beginning of the demise of GM.
I was discharged from the US Army in 1971 and I can remember gasoline being .25 cents per gallon at that time. The average car could be filled up for a few bucks and as I was still holding on to the 60s,$10 bucks would fill your car up and you would still have a few bucks to party on. I was 20 years old and women were plentiful,booze was cheap and to top it all off,.25 cent a gallon gas. At the time I thought all this would never end and apparently the folks at GM must have been partying with me as they didnt read the writing on the wall either. But, guess who saw the future and began changing to more fuel efficient autos back then? Japan!
GM made some of the finest vehicles ever made in the 60s and as they moved into the 70s quality went the way of .25 cent gas. GMs entry into the compact and fuel efficient vehicle market left a little to be desired. The Vega with the aluminum block lasted a few thousand miles (I owned one) before they started blowing head gaskets due to over heating. Ford had the Pinto which I think was a little more dependable. Chrysler even entered the compact market with the Colt and Omni. The Colt was the best of the bunch, but they were only produced a few years. Later generations of compact cars from the Big Three never improved much and eventually the Japanese would capture most of the US compact car market. By the 90s GM had recaptured some of their lost market share and stock price was back up to $80. Then in 2004 GM made what may prove to be a fatal mistake by deciding to go almost exclusively with the pickup and SUVs and shortly thereafter oil started to skyrocket. As gas prices went up light trucks and SUV sales plummeted as did the value of these vehicles.
A couple more points on more current problems for GM and we'll try to decide if there may be hope for GM and its stock. One reason US auto makers sales have been so bad is all the sedans with anything near decent fuel mileage have been sold and now all they have left are the gas guzzlers. Import auto makers sales haven't dropped near as much as US auto makers because they had a much better inventory of fuel efficient autos. Also, last week when Chrysler announced they would drop their leasing program which made up 21% of their annual sales. I then found out that when the SUVS and pickups came off lease they couldn't give them away. A three year lease and then they we're almost worthless. They are having a problem like back in the 80s when the public found out a US made vehicle would only last the first 2 or 3 years of a 5 or 6 year payment plan. Then the public started letting the vehicles be repossessed as they we're shot well before the payment plan was completed. One other bit of info to let you see how much out of tune the US auto makers are. In the first quarter of 2008 GM sold 843 hybrid vehicles and for the same time period Ford sold 5225. For the 2007 model year Toyota sold 430,000 hybrid vehicles. Toyota has a slight edge as you can see.
Now let's look at GM as an investment and see if now is the time to make a move. As I have stated before GM and Ford are staying a float with international sales. Guess who is the top company for auto sales in China. GM. I saw a list of closed GM plants in the US and they have a shell compared to what they had previously. As foreigners become more affluent they cherish US made autos. GM has made a couple of changes that will help. One thing was they got the UAW to take over the insurance health plan for the auto workers. GM has closed or will close about 10 plants and are converting a couple of plants to make fuel efficient sedans again. GM also has the Volt which will be marketed in 2010.
So, GM has a few things going the right way and there may be hope. GM started a restructuring plan in 2005 and even showed a profit of $400 million for the first quarter 2006. If you discount the 50 or 60 billion in write downs for plant closings, etc... they could be profitable now. So, if you have any speculation cash available, it may just pan out in the future. But, please with foreign sales as this is their main catalyst right now. As they bring some new sedans on line and dispose of their SUV glut and in 2010 the Volt begins production, there may be light at the end of the tunnel!
The Bear Case - Jonathan Coyle
I am no fan of GM.
Imagine if I offered you the opportunity to buy a company that sells a product that trails its competition in almost every category. It costs more to build their product. Margins are minimal. The company is on the hook for entitlements to its employees. And to add insult to injury, the product they produce is subpar on quality when compared to its competition. Would you buy this company?
If your answer is yes, go ahead and drop some cash on GM. For those with a little sanity, play the risk/reward scenario somewhere else.
Don't get me wrong, GM could be a great trade in the short term. For all the technicians out there, they can give you all the details. For those that buy stocks as a medium or long term play, GM isn't even on the radar. Most bloggers will detail reasons that are pro and con from the standpoint of the fundamentals, the management, or even the technicals. I will cover reasons why not to by GM stock from the consumer's standpoint.
GM makes products with poor quality, plain and simple.
Before all you Silverado driving guys give me a beating, hear me out. I am not saying that every single GM product is garbage. Their trucks and SUVs have been pretty good. I personally like the Silverado, although I do not own one. The Cadillac line has come on strong in the last 6 years. But GM is bigger than Trucks and Caddys. Just like a diversified investment portfolio, a company can't have all it's eggs in one basket when it comes to profits. With GM, that has been trucks and SUVs. What happens when that goes sour? Oh, never mind, that is already happening. Check your local newspaper to see the results to the tune of 15.5 billion dollars. And that's in the red, not in the black. That's chump change compared to GM's third quarter of '07, and the losses just keep on coming.
Most of the time, the debate about GM, Ford, or Chrysler is always framed by the "Buy American" premise. Somehow, people that buy American cars and trucks are suppossed to be more patriotic than those that didn't. If you buy a foreign car, then you are sending money overseas, and are a defacto Benedict Arnold. The problem for GM that has increased over the years--and it has taken a lot of years-- is hard core GM buyers have been slowly abandoning their first love, not because a foreign lady enticed them, but because their first love took them for granted and gave them a poor product time and time and time again. GM customers have ended up broke, sad, and lonely. Sounds like a good GM themed country song.
Case in point: talk to anyone with a GM vehicle that is two years old and ask them how much "upside down" they are in their loan. Don't talk to just one person, talk to as many as possible. Now do the same thing to Honda and Toyota owners. Compare the data.
Toyota and Honda owners are only upside down in their loans for a little over a year after they drive it off the lot. The cars hold their value, regardless of whether or not you want to argue that it is "only perception".
Value perceived is value achieved, and both Honda and Toyota are achieving.
Honda and Toyota cornered the market on fuel efficiency, and they slowly started taking away market share from the domestics with trucks and SUVs. They were smart, though. They didn't put all their eggs in one basket. High oil prices hurt the truck and SUVs, no problem. Diversification wins the day. On top of that, Honda and Toyota planned years ago for hybrid technology, and in the last 3 years it has paid off big. Go back to 2004 and see what GM's vice president of product development was saying about the hybrids at the following link:
http://money.cnn.com/2004/01/06/pf/autos/detroit_gm_hybrids/
What does GM have to show for the hybrid market? Oh yes, I forgot . . . they have the Johnny-come-lately to the party Chevy Volt in which they will lose money on every single one they sell. How is that good business again? My dad used to tell jokes about the dumb farmer from across the river (I grew up in Ohio, so you can guess where he was talking about) that would buy 50 bales of hay for $5 each and sell them at the market for $5 each. The dumb farmer claimed he was making up for the price by selling volume. Seems to me that GM has adopted this policy toward their hybrid line of vehicles. An expensive advertising campaign, perhaps?
GM vehicles simply do not last as long as the foreign cars. My own anecdotal evidence would be completely dismissed by domestic car zealots, but I can tell you that if you have popped the hood and actually turned wrenches on both domestics and foreign cars like I have, you would know what I am talking about. The only upside to GM vehicles have over foreign cars is the parts cost about 1/3 less......but it doesn't help when you have to fix it 3 times as often.
Have you ever had a GM car that had radiator problems? Many people did, since GM used "Dex-cool", and orange colored radiator fluid, in their systems from 1995 to 2004. Most people ended up overheating their cars and blowing their head gaskets (that's a $1600 or more repair). Every winter people are told to "winterize their cars" and some people top off their GM cars with green radiator fluid. The problem is that the orange fluid in the car doesn't mix with the green, causing clogging and overheating. Only after a lawsuit did GM stop using Dex-cool . . . talk to any mechanic and they would have told you that Dex-cool was garbage back in 1996. Of course, it took 8 years and countless GM owners parting with their money for the change to take place. If you were lucky enough not to have the Dex-cool clog your cooling system, it also would eat away all of the gaskets in came in contact with, and depending on the car, more $$$$ in repairs. Water pumps, heater cores, and even transmissions are affected by this hair-brained idea that took over 8 years to correct. That is just one of many, many reasons people don't want to buy a GM vehicle.
The "Buy American" reason to buy a GM vehicle is also going the way of the dodo. Honda employs well over 15,000 Americans at its plant in Marysville, Ohio. Hondas . . . built by Americans, in America. Jobs supporting American families. Think about all the people connected to dealerships here in America selling Hondas. Now add all the mechanics doing the maintenance to Hondas here in America. The "Buy American" tagline for GM and Ford is tiresome, boring, and specious. It may have given them a bump in yester-year, but you can't treat your customers this bad for this long and expect them to stay.
For argument's sake, let's say that GM turns around tomorrow. How long will it be to gain back a customer's confidence in quality? That's for a marketer to figure out, but I can guarantee you, it doesn't happen overnight. Even if GM starts making the highest quality cars on the road starting tomorrow, it will take years for the perception to change. You must win customers to sell product, and you must sell product with real margin to make money. GM hasn't been doing it, and it shows.
Again, GM may be a trading opportunity for some, but I am staying away from it. For all the accolades I have laid upon TM and HMC, I am not buying them either. In this economic slowdown, there will be tough times ahead, and the shares will only get cheaper in the next 6 months. That will be a buying opportunity soon. Buy quality, and avoid garbage in motion.
There may be some short term pain as the company transitions to a leaner operation focused on fuel economy vehicles. In the long term though, the risk/reward makes GM a natural candidate for any portfolio. Only time will tell.
Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs
by Hillary Mark | 08/08/08 | Stocks: GM,
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