General Motors, Inc. (GM) shares recently surged after the company announced it would use $5.5 billion in order to buy 200 million shares from the U.S. Treasury for $27.50 per share. This helps to start unwinding the major position the government has in GM as part of a bailout, after the 2008 financial crisis. The U.S. Treasury will still have about 300 million shares or around 19% of the entire company which it intends to sell within the next couple of years.
A recent article summed up the stated reasons for the bailout and for selling (part of) the position and it stated:
"The auto industry rescue helped save more than a million jobs during a severe economic crisis," said Timothy Massad, Treasury's assistant secretary for financial stability. "The government should not be in the business of owning stakes in private companies for an indefinite period of time."
That article also mentions that the U.S. government would have to sell its remaining stake for around $70 per share in order to just break-even on this investment in which billions of dollars were lost. The initial reaction to this deal was quite positive and investors bid up GM shares, even beyond the $27.50 price set for this deal. Earlier this year, GM shares were trading below $20, so the recent run has been great for investors but it seems doubtful that the over $27 share price will last for long and there are a couple of reasons for that.
First of all, I would take any price set by GM and the U.S. government with a grain of salt as neither party has the best track record when it comes to money management over the past several years. Of course, GM filed for bankruptcy not that long ago, and many would argue that the U.S. government would be essentially deemed bankrupt if it were unable to print money and control interest rates. Also, the government is selling these shares at a huge loss and that is another reason why investors should not follow this transaction price of $27.50 as having much meaning.
Another reason investors should sell into this rally is because this deal is relatively small compared to the overall market capitalization of GM, which is now nearly $43 billion. Investors who believe that the $27.50 per share price for this deal is very meaningful in the long-term would have to believe in the tail wagging the dog. That's because the deal is for about $5.5 billion, and as mentioned before, the market capitalization is around $43 billion.
It's a large amount of shares, but in no way does it make sense for a 200 million share deal to be the cause for the nearly 1.6 billion shares outstanding to be priced at that same level or higher. This deal is probably good for a short-term pop, and nothing more because macro-economic and company-specific challenges will likely rule again soon.
GM has been posting significant losses in Europe and that is likely to continue due to the high unemployment levels in many countries. Plus, the threat of the U.S. going over the Fiscal Cliff looms large and GM CEO Dan Akerson recently expressed concern that this event could impact the company. According to Lacey Plache, Chief Economist for Edmunds.com, going off the Fiscal Cliff could cause car sales to drop by 10 to 20% off of estimates for unit volumes of about 15 million for 2013. That shows how significantly the auto sector could be impacted by this event. With both sides (President Obama and Congress) still seemingly far apart, time is running short to avert this potential crisis and investors will likely return their focus on this major risk, rather than the relatively small deal that was just announced for the (partial) "bailout sale" at $27.50.
Here are some key points for GM:
Current share price: $27.58
The 52-week range is $18.72 to $27.91
Earnings estimates for 2012: $3.26 per share
Earnings estimates for 2013: $3.74 per share
Annual dividend: none
Data is sourced from Yahoo Finance.