GM's 360 Degrees

[Newbiewar]

Should I Do It? Kicking GM's Tires

It has been a busy month for General Motors (GM:NYSE - commentary - research - Cramer's Take). The automaker held a board meeting on Feb. 6, adding Jerome York -- chief adviser to the company's largest shareholder, Kirk Kerkorian -- to its slate of directors. In a round of massive cost-cutting, the company said it will slash executive pay, freeze wages of salaried workers and reduce pension and health care benefits.

On Feb. 7, the company halved the quarterly dividend to 25 cents a share, payable to shareholders of record as of Feb. 16. General Motors still yields 4.7%, which is about 250 basis points higher than the average S&P 500 company. The lower dividend will save the company $565 million of cash each year, and it was one of a few strategies that Jerome York had championed in recent months.

Before these changes, GM shareholders lost 35% holding the stock over the past year, through Wednesday's closing price of $21.19. And that's a total return, including the benefit of any dividends. The Wall Street analyst community remains bearish on GM's outlook. According to Bloomberg, just three of 20 sell-siders rate the stock a buy -- along with nine holds and eight sell ratings.

With all that in mind, I'll attempt to answer the crucial question: Is the leaner, meaner GM in the driver's seat, or does the stock remain a value trap?

In other words: Should I do it?

Not Your Father's Oldsmobile

The competitive environment is rapidly changing for General Motors. The company finally caught and passed Ford Motor (F:NYSE - commentary - research - Cramer's Take) in terms of global market share in 2005, though both are on track to be passed by Toyota Motor (TM:NYSE ADR - commentary - research - Cramer's Take) by the end of this year. The Japanese automaker is targeting younger customers, offering sharp designs and improved gas mileage at low price points.

GM's previously announced restructuring plans include the reduction of 30,000 union manufacturing jobs and the closing of 12 North American locations over the next three years. But the fact remains: GM loses money in its core business of making cars -- eking out what profits it has in recent years purely from its financing arm, General Motors Acceptance Corp. (GMAC). In 2005, the company posted a net loss of $8.55 billion, and it has pledged to cut a total of $6 billion in expenses during 2006.

Speaking of GMAC, the company is looking to sell the division. The debt of both GM and its credit arm are rated in junk territory. Rumors of a sale have been circulating for weeks and are arguably already priced into GM shares, given the recent bounce from the high teens.

Admittedly, GM's latest news does remove most of the company's near-term bankruptcy risk, because management appears to have finally quantified and addressed its cash-flow issues. Even so, one aspect of the new restructuring plans that may have been glossed over by some observers is the actual cost savings of the health care plan.

While the company says it's saving $900 million of pretax annual cost, the cash portion is expected to reach only $200 million by the end of the decade. By capping its future health care costs at 2006 levels, the company is no longer "charging itself" for expected growth in health care costs. This is similar to pension accounting, in which generally acceptable accounting principles (GAAP) allow companies to credit themselves with an "expected return" on plan assets, whether it's actually achieved or not.

In this case, GM is "saving" itself $4.8 billion on paper by changing its future health care-expense growth expectations, while the actual cash it pays out essentially will remain the same. Any material cash savings will not likely be possible until GM next tries to renegotiate labor contracts with the United Auto Workers union in 2007.

A lot of the company's future success is also based on the expected success of a new GMT-900 SUV line. The overall market for these everyman trucks has been steadily declining over the past several quarters, especially with gas prices hanging around the $2.50-to-$3-a-gallon range.

My advice to readers? Avoid the stock. The headlines of the company's latest restructuring plans may appear attractive, but management has done little more than stave off a near-term bankruptcy filing. I don't believe the new board members have any new tricks up their sleeves, and readers should avoid falling into the value trap of GM shares.

[91z4me]

Wow that article had a lot of things wrong. The biggest error is that GM has been ahead of Ford in terms of global market share since like 1930 and has been the top sales leader ahead of Toyota and all others for quite a while. Do some research next time whoever wrote this article.

[Clownzilla]

I have not seen $2.50-$3.00 gas in my area for several months.......not even close! Maybe in a huge city but he says it as a country as a whole. I take this article as more propaganda!

[Cadillacfan]

Well, I live in a small city and the gas prices have been above 2.50 for a long time. Though, I also live in NY state and they tax the hell out of everything.

[Newbiewar]

I have not seen $2.50-$3.00 gas in my area for several months.......not even close! Maybe in a huge city but he says it as a country as a whole. I take this article as more propaganda!

here in cali primum is about 2.69 so... regular is probably about 2.49

ummm as i was reading this article, i was like... this guy isnt really giving GM any credit for what it has in its corner... look at the aura, the buick enclave, look at GM's 62% market share of these vehicles he's concerned with 3$ gas gallons...

people want GM to just abandon that 62% market share of SUV's? GM thinks they ought to increase it...

If GM can get a home run or two, their Cars can explode with sales... GM has a lot of sales to go... it would be interesting to see GM's car marketshare... the truth GM can expand soo quickly if it gets a home run or two

Edited February 23, 2006 by Newbiewar

[Clownzilla]

here in cali primum is about 2.69 so... regular is probably about 2.49

ummm as i was reading this article, i was like... this guy isnt really giving GM any credit for what it has in its corner... look at the aura, the buick enclave, look at GM's 62% market share of these vehicles he's concerned with 3$ gas gallons...

people want GM to just abandon that 62% market share of SUV's? GM thinks they ought to increase it...

If GM can get a home run or two, their Cars can explode with sales... GM has a lot of sales to go... it would be interesting to see GM's car marketshare... the truth GM can expand soo quickly if it gets a home run or two

I'm from shouthern MO, and all the way up to St. Louis and Kansas City gas is below $2.00. It's been no more than 2.10 for some time. That's good because this is a huge domestic truck area. Anyway, I think if the Enclave is as close as Lutz says it is to the concept, GM will have a major winner. Don't know much about the Aura, but from the looks of it I can't see people not liking it. I think GM should keep developing their SUV's and trucks because I have a feeling when GM gets's that higer end hybrid affordible enough, they can really stick it to Toyota and increase the momentum of the resurgence of GM.

[FUTURE_OF_GM]

though both are on track to be passed by Toyota Motor (TM:NYSE ADR - commentary - research - Cramer's Take) by the end of this year.

Has this guy been under a rock for 2 months?!?!?!

See, this is the kind of FABRICATED, INNACCURATE that shouldn't be excused... This guy MADE the news and now, many unknowing americans will take it as gospel.

The Japanese automaker is targeting younger customers, offering sharp designs and improved gas mileage at low price points.

ALL opinion, which shows his bias... and not ALL accurate. "Sharp designs" I haven't seen any... "Low price points" Yeah right!

A lot of the company's future success is also based on the expected success of a new GMT-900 SUV line. The overall market for these everyman trucks has been steadily declining over the past several quarters, especially with gas prices hanging around the $2.50-to-$3-a-gallon range.

Declining and disappearing are two different things.... It's all about the margins folks... More GMT-900s at a higher selling price = a healthier GM, regardless of whether or not the market is "declining" so long as the bottom doesn't fall out.

the value trap of GM shares.

EVIL GM!!!! Trying to "bribe" people to buy their stock...

Wow that article had a lot of things wrong. The biggest error is that GM has been ahead of Ford in terms of global market share since like 1930 and has been the top sales leader ahead of Toyota and all others for quite a while. Do some research next time whoever wrote this article.

Yep, and these are the people we trust to form our opinions for us and analyze and advise us on stocks.

people want GM to just abandon that 62% market share of SUV's? GM thinks they ought to increase it...

Yep, so Toyota can SAVE all those truck buyers too.

the truth GM can expand soo quickly if it gets a home run or two

Hence why the anti-Detroit drum beat hasn't let up.... Detroit can still come back.

[haypops]

I have a feeling when GM gets's that higer end hybrid affordible enough, they can really stick it to Toyota and increase the momentum of the resurgence of GM.

By the time get ahead of Toyota in hybrids, Toyota will have moved on to diesels.

[loki]

in SE missouri i've seen under $2 , a few places.

[ellives]

Here's the original link:

http://www.thestreet.com/_tscs/comment/inv...g/10270053.html

Personally I dislike these kinds of articles, signed by "the staff." My local rag newspaper started doing it recently instead of having the editor's name on there. I suspect this is to deflect some of the feedback they were getting on her articles. To me it's another sign of cowardice on the part of the newspaper publishers.

[haypops]

To me it's another sign of cowardice on the part of the newspaper publishers.

I suspect that it is a feeble attempt to give credit to the many people who researched and wrote the article.

[VenSeattle]

I suspect that it is a feeble attempt to give credit to the many people who researched and wrote the article.

Well, after reading it... I wouldn't want credit for the research performed either.

[Newbiewar]

Well, after reading it... I wouldn't want credit for the research performed either.

lol!.. soo true...

[ellives]

I emailed them a nastygram. Probably won't have any effect but it made *me* feel better.

lol!.. soo true...

[Chicagoland]

I didn't realize the new Toyota Tundra's were "economical sharp designs" that get over 30 MPG??

Some idiots still don't know Toyota actaully makes big trucks, and not all of their cars are 'sharp designs for young people'. Camry/Corolla/Avalon sure are not.

Also, contrary to popular beleif, they do not ONLY make hybrid powered cars. And, 'hybrid power' is not 100% electricity.

Edited February 24, 2006 by Chicagoland

[ellives]

Hybrid's have to be the stupidest vehicles and best example of herd mentality on the market today. There just is no justfication for the cost of them. You'll never get your money back on the extra cost. Why buy them? I have some land under a bridge I'd like to sell these idiots too.

I didn't realize the new Toyota Tundra's were "economical sharp designs" that get over 30 MPG??

Some idiots still don't know Toyota actaully makes big trucks, and not all of their cars are 'sharp designs for young people'. Camry/Corolla/Avalon sure are not.

Also, contrary to popular beleif, they do not ONLY make hybrid powered cars. And, 'hybrid power' is not 100% electricity.

[Newbiewar]

Hybrid's have to be the stupidest vehicles and best example of herd mentality on the market today. There just is no justfication for the cost of them. You'll never get your money back on the extra cost. Why buy them? I have some land under a bridge I'd like to sell these idiots too.

thats the advantage to the GM hybrids, they arent very expensive... maybe 900-1500 bucks... for an extra 15-20% fuel ecconomy... that money could be recouped within a year

[drew770]

I wonder if the media will give GM credit for the "Green Line" vehicles? If they do it will probably be with a wink and a nod and still complain about GM's big ole gas sucking SUVs while at the same time ignoring Toyotas gas sucking SUVs and Trucks.

[ellives]

Time will tell. I personally hadn't heard about them until the last couple of weeks. This is one of GM's many problems. They don't get the message out. They let the Toyota media blather on and don't respond. They should speak up loudly about their own positive news and voraciously attack Toyota's (in the ever-so-subtle way the media does it's dirty work) bad news and weak spots.

I wonder if the media will give GM credit for the "Green Line" vehicles?  If they do it will probably be with a wink and a nod and still complain about GM's big ole gas sucking SUVs while at the same time ignoring Toyotas gas sucking SUVs and Trucks.