Slamming the Brakes on GM - Barron's

With all the troubles facing U.S. automakers, government help may be the deciding factor in the survival and ultimate shape of the industry. For General Motors (GM), says Barron's Vito J. Racanelli, government aid may save the company from collapse but investors should steer clear.

Late last spring, Barron's called GM a buy, a call it now admits was a mistake. GM shares have fallen 82.5% this year, U.S. sales were down 45% in October, its market capitalization is just $2.5B and there is speculation GM may be removed from the Dow Jones Industrial Average. The company cites tighter credit, higher unemployment, lower incomes, falling stock prices and a continued weakening of the housing market for the 'abrupt halt' in consumer spending it's experiencing.

Its Q3 earnings, released last week, show how badly the company has been hurt. GM posted a loss of $2.5B, or $4.45 per share. Revenue fell to $37.9B from $43.7B. Vehicle sales were down 11% to 2.1M. Even more worryingly, GM burned through $6.9B in cash in Q3, reducing its reserves to $16.2B, and warns its liquidity is approaching 'the minimum amount necessary to operate' even if it implements $20B of 'liquidity initiatives' it has identified through 2009.

To put it bluntly, Shelly Lombard, a credit analyst for Gimme Credit, says GM is headed for bankruptcy without government help and the existing $25B of government loans is "like bringing a Band-Aid to a train wreck. GM needs a major government bailout." At this point, with hundreds of thousands of jobs at stake industry-wide, a bailout seems inevitable. But buyers beware: GM might pull through the crisis, but investing in a company that needs a bailout to survive is a questionable approach to profit making. What was once the largest automaker in the world is now a highly speculative small-cap stock with a murky future.

• Gary McCarthy, of Collins Stewart, rates GM stock a Sell. Even with government aid, he says, GM will still need additional capital, likely at shareholders' expense.

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• Filing for Chapter 11 isn't an option, GM CEO Rick Wagoner says, as "we’re convinced the consequences of bankruptcy would be dire." Asked for an alternate solution, CFO Ray Young answered "We’re going to get creative, we’re going to get creative here."
• The U.S. government could hand GM a tremendous sum of money and watch it be burned up in the fire of management's stupidity," writes Doug McIntyre on 24/7 Wall Street. He believes the company is probably worth more in pieces, and "its best operations could be sold off without legacy obligation.

Comments

[arlin:]

GM should fail.We should let it reorganize,without all of its current limitations,If the gov bails it out,nothing changes,except the gov wastes more taxes......who is going to bail out our gov?"To big to fail"seems to be a mantra like code for new deal cronyism.

2008 Nov 09 08:53 AM

[John D:]

Is anyone surprised that a buy rating was a mistake - at the time it looked good, but, given the volatility in the market I would think that not just GM but probably 75% of all companies were rated wrong. This is not just about GM or GE or IAG - this people is about the survival of the people in North America - you can lay blame all you want but if you ever want to get back to the life you so dearly enjoy - WE all better start supporting our industries and businesses or you to will be living in huts or tents and gathering firewood just to keep your family warm. As far as steering clear - is like walking away from your house when it's on fire and trying nothing to save it.

2008 Nov 09 09:42 AM

[fg144331:]

World wide, we've to many car models and to many car mfg companies. Why must the US's 3 survive? Chrysler was saved by the Gov once before and is still not doing well. C cars are some of the worst mileage cars around, now they are saying they have electrics, maybe a bit to late. Our local dealer, jeep and C looks like it will be closing too, I haven't seen anyone looking at cars on their lot lately.........

2008 Nov 09 10:25 AM

[Dave M.:]

The TV manufacuring industry failed in the US, (RCA, Magnavox, Philco, DuMont) and we are no worse for the wear since we didn't bail them out. Let the big three fail. Creative destruction, I say. Many foreign car makers have plants here in the US. Probably WITHOUT UNIONS. I would think that parts suppliers sell to them to, so the domino effect might not be so damaging as one would think.

2008 Nov 09 10:52 AM

[bbowen7:]

A first test for the New Industrial Policy - not so much of a bailout of a failing industry, as an opportunity to redirect a core industry to produce vehicles which reduce foreign oil imports and emissions while saving lots of jobs. Pretty compelling in dire economic times with new political leadership which doesn't particularly believe in free market capitalism. The challenge for the conservatives is to articulate why this shouldn't be the first (after banking) of many.

2008 Nov 09 10:58 AM

[Mister Jimmy:]

Dave M, your comment "I would think that parts suppliers sell to them to" is remarkable. Before you suggest something that could have devastating consequences, understand what you're talking about. As far as us feeling no worse for wear on the failure of the U.S. TV manufacuring industry, have you checked the trade deficit lately?

2008 Nov 09 12:45 PM

[Jim Bob Jones:]

That's mighty brave talk there User! This is the heart of the american car industry. If you think the banks put us in a spin just wait untill you fire the car workers. If we keep pulling the industries apart (even though they were managed by stupid people) we have nothing to fill the void. Let them continue under a watchful eye and now maybe we will get the green cars we've been asking for. Better to loan the money to them than another foreign company. They built what the public wanted, just ask the public.
SUVS are sitting in a lot of american driveways. It's hard to take trips in The little jap hybrids. Americans are somewhat larger and also obese.
Also if you stop that union dollar in the neighbor hood who is going to spread the wealth. You? I think not.

2008 Nov 09 01:19 PM

[Dave M.:]

When the trade deficit stops including oil imports in it's numbers, then I'll start paying attention to it. Until then, it's a compromised number. Getting back to the US carmakers, the main problem is that for many,many years they were paying high school dropouts $90,000 a year to screw nuts on bolts. And then a lavish pension based on that inflated paycheck. No wonder the big three carmakers are failing. Greedy unions gutted these companies and the companies caved in every time they were the "strike target" that year when the UAW contract was up. Don't tell me I don't know what I'm talking about, I've been around for a long time and got older and wiser.


On Nov 09 12:45 PM Mister Jimmy wrote:

> Dave M, your comment "I would think that parts suppliers sell to
> them to" is remarkable. Before you suggest something that could have
> devastating consequences, understand what you're talking about. As
> far as us feeling no worse for wear on the failure of the U.S. TV
> manufacuring industry, have you checked the trade deficit lately?

2008 Nov 09 06:19 PM

[D-D:]

Even if GM gets financial support of some kind, am I ever going to buy an American car when Japanese have been making superior cars? The answer is no. Why waste money saving GM?

2008 Nov 09 09:56 PM