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General Miracle?

Created:
13 August 2008
Written by:
Alistair Blair

Few readers will be interested in General Motors. But that may be a mistake. Although everyone broadly understands this once iconic company, it's beyond the radar for UK investors and its impressive past long ago gave way to a grisly present. GM has lost $50bn (£26.7bn) in the last three years and will dump another $18bn this year. The company has been overwhelmed by the pension obligations and healthcare costs accumulated during its glory years. It makes too many cars and it makes too many big cars. Its infamous Hummer brand now appears more on smaller vehicles than it once did. But they are still very large vehicles.

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The shares are down from $70 at the turn of the century to $11. Last month they went under $9. Even the 1970s oil crisis and associated recession took them down to only $11. That was 35 years ago. To the tidy mind, the conclusion is clear: it's curtains. GM is this year celebrating its 100th year. Many believe it won't make 105.

Of course, this makes GM a fascinating stock for value-hunters. Value often lies in stocks that have been written off, and few stocks have been more written-off. Although shareholders' funds at the year end were minus $38bn, and are clearly heading past minus $50bn, the current share price capitalises $180bn of sales at just $6bn. And the $38bn was largely due to a writeoff of deferred tax: it wasn’t all cash going out of the company. Yes, it's bonds are junk-rated, but what do you expect?

Brandes, the weighty US value-oriented investment manager which made good money by backing Marks & Spencer's recovery, owns seven per cent of GM. Southeastern Asset Management, another noted value investor, has a similar position. They're both sitting on significant losses, but then, that’s what value investors are willing to do.

This week, Rick Wagoner, chairman and chief executive of GM, gave an upbeat interview to the Financial Times. Of course, it is the chief executive's job to be upbeat, and you have to read between the lines. But as chief executives go, Wagoner is relatively considered. For all his responsibilities to keep his chin up, he has not been shy to tell previous interviewers that GM is in the soup. This week, between the lines, there seemed to be some sunshine. His comments moved the shares up ten per cent.

Bearing in mind that the company is worth about $60bn less than when he got the job eight years ago, Wagoner gets an astonishingly good press. His optimism rests on two foundations. First, despite a new overlay of general economic gloom in the US which will push out any prospect of significant operating profits in the US until 2010, he argues that GM’s Augean stables have been cleaned out. Those healthcare costs have been pushed out of GM. This took years to negotiate and the cost is $30bn, but the problem has finally been contained.

GM's big reputation for building unattractive cars is also beginning to turn the corner. They will be "just names" to UK readers, but the Chevrolet Malibu, the Buick Enclave and the Cadillac CTS, which GM has designed and launched over the last four years have been signal successes with US car buyers. And Wagoner claims that GM’s manufacturing capacity has been remodelled so substantially that its US cost base will be down by $9bn.

Still, pessimists note, it used to have half the US car market and now it has just 20 per cent.

The second foundation of Wagoner's optimism is GM's strength in emerging markets. Here is an interesting fact for optimists and value-hunters: ten years ago, GM's market share in China was four per cent. This year, it's 12 per cent. And the Chinese car market has of course grown tremendously: by a third in 2006 and a quarter in 2007. This year, it will slow down to 10 per cent. You can almost buy at face value Wagoner’s claim that he doesn't lose sleep about this deceleration. As he told the FT, vehicle density in China is still very low.

If I have engaged your imagination, I suggest you look up autoextremist.com, where Peter de Lorenzo - the foremost commentator on the US car industry - is engaged with himself in the same "Is it dead or could it make it?" debate about GM attested in its current share price. Lorenzo has been the company's (and Wagoner's) arch critic for years, but even he thinks that "maybe, just maybe, GM might have a shot to be around for another 100 years."

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Read more of Alistair's columns at his IC home page.

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Alistair Blair is a past winner of the Business Writer of the Year Award, and has worked in investment banking and fund management.

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