Updated from Feb. 8Editor's note: The "Should I Do It?" column runs every Wednesday and is written by David Peltier, our value stocks expert. In the column, David takes a look at a value stock and explains if you should snap up shares or pass it over.Peltier is a regular on RealMoney and also writes TheStreet.com Value Investor.
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.
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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. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;
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