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Should I Do It? Kicking GM's Tires
It has been a busy month for
. 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
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
, 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
in terms of global market share in 2005, though both are on track to be passed by
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.
David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. Our expert on value stocks, Peltier writes the weekly "Should I Do It?" column and also writes TheStreet.com Value Investor.To view David Peltier's video take on this column, click here
Auto Stocks: Back in Drive?
Editor's Note: This column by Jay Shartsis is a special bonus for
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It is noted that three stocks in the long-suffering auto parts group experienced "selling climaxes," or bullish weekly reversals last week (new low but reversed and closed up for the week). They are
American Axle & Manufacturing Holdings
The current issue of
magazine discusses the potential for a General Motors bankruptcy, and Ford was also featured negatively on a magazine cover. That is all often reliable contrary stuff, and combined with those reversals, it argues that the stocks already reflect all the negative prospects that have been well publicized. Of these, Ford has established a series of rising bottoms and is perhaps the most bullish of those charts.
At the time of publication, Shartsis was long GM, although holdings can change at any time. Shartsis is director of options trading for R.F. Lafferty, where he has authored his market letter "Shartsis on Charts" since 1979, and currently manages accounts of $100,000 or more with an accent on option selling.
Technical Take: Highway of Pain
General Motors has been running on the highway of pain for more than two years. If you are a strict fundamentalist, you probably believe that fundamentals come first, and that the price action in the stock is a reflection of the underlying fundamentals of the company.
A look at the weekly chart tells us that the fundamentals still aren't working.
After dropping off a cliff in early 2005, the bargain hunters began snapping up shares around $24. Pretty heavy volume, too. The subsequent advance finally stalled at $35 before rolling over once again. Last November, the selling pressure pushed GM right through the $24 level as if it wasn't even there.
This heavy downward momentum occurred on extremely high volume. That will often signal that a bottom is close at hand.
We're still waiting, because the advance failed at the precise level as the April bottom and is rolling over once again.
Notice that the price-by-volume bars show the greatest volume occurring between the low $20s and the mid-$30s. This is the level at which the greatest emotional and financial commitment lies.
And with GM now trading below most of those levels, a lot of bulls are just waiting for an opportunity to sell.
At this point, I'm not sure why you'd want to bottom fish on GM -- the path of least resistance is decidedly down. The short interest comprises more than 17% of the float, so GM is a crowded short. GM might be more compelling if it advances above the resistance currently lurking at $24.
Until then, I'd stay away. There are easier trades.
RealMoney.com contributor Dan Fitzpatrick is a freelance writer and trading consultant who trades for his own account. At time of publication, Fitzpatrick held no position in GM, though positions may change at any time.
State Bailout in the Offing
Editor's Note: This column by Christopher Atayan is a special bonus for
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on Feb. 15. To sign up for
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General Motors announced on Feb. 14 that it intends to spend $545 million on upgrading five plants. Four are located in the state of Michigan. I suspect that a possible bailout by the state of Michigan is in the offing.
Michigan has not participated in the strong economy of the past few years to the same degree as other states. For the most part it is still in recession mode. I know this from significant family interests in the state and in the automotive industry in particular. As such, the governor of the state has been working overtime to attract investment from various automakers, foreign and domestic.
My instinct is that GM is probably pushing behind the scenes for a state-rescue financing. Michigan is one of the few states that manages its own pension funds. By and large over the years, the pension fund in Michigan has managed to remain politically independent and has actually produced solid returns. This time, though, the political pressures may be too strong, and GM knows that a few well-placed plants can go a long way. I would not be surprised to see the state put up a couple of billion dollars in the form of a convertible preferred or a similar instrument.
If the state made a significant investment, it would probably help both the bondholders and the stockholders, although the benefits in the short run will accrue primarily to the bondholders. From the standpoint of the stock, it would take the bankruptcy scenario out of play and probably put a floor in place. It will take fundamental improvement in the business for the stock to appreciate, though.
Atayan is a managing director of Slusser Associates, a private-investment banking firm in New York that specializes in mergers and acquisitions and structured financings, and is also a principal in GBH Investments, which makes private-equity investments on behalf of an educational foundation. At the time of publication, Atayan had no position in GM, although holdings can change at any time.
UAW Negotiations, Major Ramifications
For GM, the possibility of a calamitous labor strike at its bankrupt auto-parts supplier has been averted for the time being, but the risk of a crisis remains.
, once a subsidiary of the world's largest automaker, said last week it would postpone any action to cut retiree health benefits until March 31 at the earliest. Such a cut, if taken, could inspire a strike by the union that represents hourly workers at GM and Delphi. A strike could drain GM of its healthy cash position and push one of the nation's largest debt issuers into a bankruptcy of its own.
In its attempt to alleviate its burdensome cost structure, Delphi has threatened in its bankruptcy proceedings to reject collective-bargaining agreements and to terminate hourly post-retirement health-care plans and life insurance.
"While major obstacles and difficult issues remain to be resolved, the discussions to date with GM and our major unions helped frame the concerns and objectives of each organization," Delphi said in a statement.
GM and the workers union, the United Auto Workers, welcomed the temporary stalemate as progress toward an acceptable resolution.
"While there are many significant issues to be resolved, Delphi's decision to delay the filing of the Sections 1113 and 1114 motions provides the opportunity for that process to work and is certainly a positive action," said a statement from Ron Gettelfinger, UAW president, and Richard Shoemaker, union vice president and head of its GM and Delphi departments.
An accord between Delphi and the UAW isn't guaranteed. Any agreement reached between Delphi and the union could have major ramifications for GM in its dealings with the UAW, as a new round of contract negotiations between GM and the union are scheduled for 2007.
here to read staff reporter Nat Worden's full story.