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Dow Jones S&P 500 NASDAQ 10-Year Note
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RealMoney.com : FaceOff - Odette Galli


GM's Not as Good as It Looks

By Odette Galli
Columnist
12/14/2001 07:26 AM EST

If I had to own an auto stock right now, it would be General Motors (GM:NYSE - news - commentary - research - analysis). GM has made tremendous productivity gains, has strong new-product momentum and a relatively good financial condition -- at least on the surface, anyway, especially when compared with Ford (F:NYSE - news - commentary - research - analysis). And there's no denying that the stock is undervalued, selling at close to a recession-level valuation of just 0.19 times sales.

But cheap or not, I don't want to own any auto stocks right now, GM included. First of all, I'm not as convinced as GM's management seems to be that the firm's market-share gains are for real. True, the company succeeded in raising its market share back up to 32% in October. But at what cost? GM was first to launch the zero-percent financing programs in September. These programs boosted sales to levels not seen in years. My question is how much of GM's so-called share stabilization is the result of unsustainably low pricing? Once those programs expire, it's very likely that auto sales as a whole -- and GM's sales in particular -- will plunge.

If GM's market share assumptions are off, there could be additional capacity cutbacks needed. Morgan Stanley Dean Witter's auto analyst, Steve Girsky, thinks that if GM's share drops back to 28%, which is where it was before the zero-percent financing deals were put in place, the company would have to shut four plants to bring supply back in line with demand. If that were to happen, analysts' estimates would have to come down.

Although GM's balance sheet appears to be in better shape than Ford's (see my recent column about Ford's deteriorating situation), the company does have several serious, off-balance sheet issues. So, even though you might think the auto business is in great shape, much of the excess cash being generated may have to go to fund these liabilities. These include:

  • Postretirement benefits on the rise. GM has the oldest workforce of the Big Three, with 2.5 retirees for every one active employee. At the end of last year, GM's postretirement benefit obligation, net of funding, was $43.9 billion. Although that already represents a staggering 1.6 times GM's equity market value, this liability could move even higher. Girsky says GM had been using a health care cost inflation rate of 8%, but it's actually been running at least 10%. And the Securities and Exchange Commission has begun looking into companies' inflation assumptions. Each percentage-point increase in GM's health care cost assumption increases its liability by $5.2 billion, according to Girsky's calculations.

  • GM has told analysts that their pension is underfunded. GM's pension could be underfunded by $7 billion to $10 billion by year-end. The problem is that the automaker had been using a 10% return assumption on its pension plan assets, a level the company has not achieved in either the past two years or in three out of the past five years, according to Girsky. While not an imminent problem, by 2003 GM will probably have to contribute a substantial amount of cash to fund its pension obligations.

  • GM may owe Fiat a big payment in the future. In March 2000, GM and Fiat entered into an alliance in which GM took a 20% stake in Fiat Auto for $2.4 billion, and Fiat purchased 32 million shares of GM. Fiat just announced a $2.2 billion offering of notes that are exchangeable into the 32 million shares of GM stock it owns. Fiat also holds a put option to sell the other 80% of its auto business to GM in 2004. If Fiat were to exercise that put option, the cost to GM for the remaining 80% of Fiat (based on the fact that 20% of Fiat cost GM $2.4 billion) could be between $9 billion and $10 billion.

    • GM appears to have a lot more going for it than Ford right now. And unlike Ford, GM has not cut its dividend yet. But if management starts paying more attention to these looming off-balance sheet liabilities, its $1.2 billion dividend could be at risk. I'm happy to wait and see what happens with that before getting near this stock.


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    Oil *
    77.73
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    Odette Galli writes daily for TheStreet.com. Before coming to TSC, Galli was a writer at SmartMoney Magazine. Prior to that, she worked as a senior manager at Ark Asset Management where she managed $3 billion in institutional assets. In addition, Galli was a senior vice president at J & W Seligman. She has also served as a research analyst for Morgan Stanley.

    In keeping with TSC's editorial policy, Galli doesn't own or short individual stocks, although she owns stock in TheStreet.com. She also doesn't invest in hedge funds or other private investment partnerships. She invites you to send your feedback to Odette Galli.
    Read our conflicts and disclosure policy.
    Order reprints of RealMoney.com articles. Top


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    Dow Jones S&P 500 NASDAQ 10-Year Note
    10,452.68 1,109.24 2,185.03 33.23
    Oil *
    77.73
    DOWN
    18.90
    UP
    0.38
    UP
    9.22
    UP
    0.48
    10 Yr
    3.32%
    SPDR Gold
    119.18
    -0.18%
    +0.03%
    +0.42%
    +1.47%
    		Data delayed 20 minutes