Has General Motors Earned a Bailout?

Recently John Tamny wrote an article, Pull the Plug on General Motors (GM), in which he discusses the various reasons why it is essential to let GM fail. So we thought we would give you a graphical representation of GM's historical ability to create shareholder value, along with a Value Expectations scenario of what GM must generate to sustain its current price.

The Economic Margin chart below displays GM's consistent inability to earn its cost of capital and continuous destruction shareholder value.

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Given such poor levels of Economic Margins there is no surprise its relative returns to the market have plummeted.

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So what does this mean for current shareholders?

Yesterday, GM's stock price closed at $3.59. So to put things into perspective, the graph below of our Value Expectations application displays the type of performance GM must deliver to justify its current stock price. By holding sales growth at an inflation rate of 3% and asset turns of 1.20, GM needs to generate EBIDTA's of 12.29 annually for the next five years.

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GM would have to deliver and maintain EBITDA Margins not seen since 1994.

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As shareholders you have to ask yourselves, will GM ever be able deliver those levels of EBITDA Margins? As taxpayers we have to ask ourselves if a bailout would just be a waste of tax payers' money. Given GM's consistent destruction of wealth and the tremendous amount of restructuring it would need, a bailout looks more like life support.

Disclosure: None

Comments

[Mister Jimmy:]

Consider that GM and its employees have themselves paid billions into the Federal treasury over the company's 100 year history. Also consider the two world wars and cold war that GM technology and products helped win over that time. An on-going restructuring, underscored by world-class products, has been underway at GM. It was thrown off-track by a financial industry that caused a world wide crisis because of ITS products, namely worthless mortgage backed securities. So, in spite of all of this, you say GM has not earned Federal loans? GM not only deserves these loans but, based on the above, I dare say it might be owed to them.

2008 Nov 26 07:53 AM

[packrat:]

My question is,does CITIBank deserve a $350 billion bailout?First they get a $25 billion bailout, no questions asked.Then they come back and get another $20 billion bailout, again no questions asked, but this time they have the government guarantee another $306 billion in risky loans.The figures are mind boggling and this is just one Bank.Why were"nt they called before congress to present a game plan or tell the government how they were going to pay this money back?The entire top management team at CITI should be fired.How could the government give this kind of money to the same people who drove the bank into the ground?

2008 Nov 26 08:19 AM

[eddie6442:]

I would like to see the results of a CASE STUDY on a "DETERMINATION OF A GOVERNMENT LOAN TO GM, FORD, and/or CHRYSLER and HOW MUCH", from the MBA programs at WHARTON, HARVARD, STANFORD,etc.
These masters students would be unbiased, honest, realistic, analytical, unencumbered, and driven by the need to achieve an A or B GRADE, by GETTING IT RIGHT..............
ASSUMPTION #1 -- Government is loaning "borrowed money" so MUST BE REPAID!!!!!!!!

THINK ABOUT IT..........

2008 Nov 26 08:30 AM

[lbange17102:]

Personally, I find it rather interesting this is even being discussed. There are MILLIONS of jobs at stake overall, with the potential domino affect that would occur. With all the hype over what was done wrong by whomever, the bottom line is that if they are forced to close (and the bankruptcy is not a long term option since their sales would be even worse), millions of workers jobless, their income taxes collected go to ZERO, unemployment benefits sky-rocket, social services requests for help sky-rocket, so look at the governmental affects of that flip side of the coin. Tax revenue cut substantially, help programs expenses soar, forecloseures increase putting yet more strain on the financial markets - it is a lose lose situation.

Our fellow Americans NEED the government and the rest of the people to step up to the plate and help the middle guy out for a change. They did nothing wrong.

So YES HELP the auto industry... its time we start helping the US companies to survive for the well-being of Americans.

2008 Nov 26 09:40 AM

[BADDOG1:]

YES GM IS ASKING FOR LOANS NOT A BAILOUT THE FEDERAL GOVERMENT HAS CREATED MOST OF THE PROBLEMS FOR GM AND THE OTHER TWO U.S. AUTO MAKER BY HAVING SUCH STRICKED E.P.A. STANDARDS AND FUEL MILEAGE REQUIREMENTS. NO OTHER AUTO SHOULD BE ALLOWED THE BE BROGHT IN TO THIS COUNTRY UNLESS IT HAD TO MEET THE SAME STANDARDS E.P.A. AND IT'S WORKER MAKING A GOOD WAGE AND BENIFITS. UNTILL THIS IS STANDERDISED WE THE U.S.A. WORKERS CAN NEVER COMPETE. THE GOVERMENT SHOULD KEEP ITSELF OUT OF THE PRIVATE SECTOR. IT SHOULD ALSO STOP ALL THIS PORK SPENDING /SPECIAL INTEREST THAT IS NO INTEREST TO MOST OF THE COUNTRY.

2008 Nov 26 09:56 AM

[BobMichigan...:]

Just one question - how much questioning did Citigroup endure before receiving 10x the money?

You know, important questions like private jets.

2008 Nov 26 10:33 AM

[BobMichigan...:]

BTW - Baddog - people would be much more inclined to pay any attention to your posts if you QUIT SHOUTING!!!!!!!!!!!!

2008 Nov 26 10:34 AM

[gon4beer:]

I don't feel that ANY of these companies desrerve a bail out. Why not give $ directly to consumers-say ~ 50k/person, and tell us that this $ is tax free as long as we use it to pay down debt? This reduces consumer debt, gives cash directly to the financial institutions that need it, and reduces direct contol of the economy by the government, which is a GOOD thing. This also let's GM live or die on it's own merits-if they can sell cars, good cars, they survive-if not, they morph into something else. there is also a misunderstanding of what would happen if GM went under (Chapt 11). Sure, there would be a disruption, but folks who have been better shepherds of their capital will step in to buy GM assets, plants, inventory, etc. at bargain prices, firgure out a way to make money, and then offer workers non-union jobs (which are way better than no jobs) . In this case, the Fed would be helping displaced workers with unemployment compensation in the interim. Rick Wagoner, the UAW et.al. have run that company into the ground and DO NOT deserve to be given another chance-at least not with taxpayer money. Read Mitt Romeny's take on this from a week ago-very enlightening.

2008 Nov 26 10:58 AM

[epeon:]

Whether GM has earned a bailout or not is largely irrelevant. What really matters is that if we give GM $25 or $50 billion are we going to be in the same position a year or two down the road? In other words, is giving money to GM the equivalent of throwing money into a rathole?

Given GM's current cost structure, it is hard to see a viable path forward. GM is basically paying $30/hr for labor more then the transplants when fully amortized (including legacy costs). This is a significant cost advantage which will simply, at some point, push GM back to bankruptcy's door again. So, the only finanical sense to make of this is that GM has to lower its cost structure to that of the transplants. Otherwise, giving them money just puts off the inevitable.

2008 Nov 26 11:00 AM

[scfranklin94:]

The automotive industry manufacturing capacity is overbuilt by 20 to 30%. All of the Big 3 need to downsize their workforces, but they can't afford to do that and still pay their defined-benefit pension programs.

No one has protected my retirement investments from risk of loss, other than myself. Why should I pay taxes to keep auto workers pensions whole, while mine gets shafted?

The US economy is going into a long down turn, we should quit fighting it and get used to a lower standard of living.

2008 Nov 26 12:41 PM

[AmericanVOR:]

No, GM does not deserve a bailout. However, they do deserve a loan, which is what they are asking for.

"...it is hard to see a viable path forward. GM is basically paying $30/hr for labor more then the transplants... This is a significant cost advantage which will simply, at some point, push GM back to bankruptcy's door again..."

V.E.B.A. It has already been agreed upon and signed. It essentially eliminates the labor cost difference that people and media keep bringing up over and over and over and over and over...

That issue has been resovled and is a valuable metric in the plans for GM's resurgence.

" ...All of the Big 3 need to downsize their workforces, but they can't afford to do ..."

GM has cut its payroll drastically, by 45.8 percent in the U.S. alone since 2000. In fact, GM is far from the largest employer in the industry. With 252,000 employees worldwide, GM ranks fifth overall behind Volkswagen (373,400 employees,) Renault/Nissan (316,121 employees,) Toyota (316,121 employees) and Daimler (272,382 employees). Yet GM sold more vehicles worldwide last year than any other automaker.

2008 Nov 26 02:19 PM

[Abouttime:]

This article and most others fails to mention that the products that GM and ford are producing are outstanding - last I checked they were selling above and/or even volume with Toyota. Toyota and Nissan were chasing GM hard to bring on line full size vehicles; however our press always fails to recognize that GM and Ford are producing and bringing on line some outstanding products. Add to the product line significant structural cost reductions across the business including the Unions, this business can generate significant cash once the economy recovers. Honestly, I have not heard anything new from the media or analysts over the last few months, they seem to be repeating each other or at best articles such as this that ignore the opportunity in this business and recognize what has been done by at least GM and Ford to position the American Industry for a return to greatness. One other note, having lived abroad for a number of years, no one ever seems to mention or provide the details behind the non-US automakers that are significantly protected, subsidized, deregulated and provided other support (think currency/trade barriers) by their governments to ensure that they have an advantage in structural cost. Why haven't the 'analysts' analyzed and reported on this fact? hmmm, guess they are too busy taking the easy road to sensationalize their material.

2008 Nov 26 02:56 PM

[Thomas O'Br...:]

It is imperative that the Government helps the auto industry because they are a great part of the industrial base of this country. Also the government should change regulations so that the American auto Industry is plating on a level playing field when it comes to exporting American cars to countries like Japan and Korea , and that would help greatly.

2008 Nov 26 03:42 PM

[jonros:]

If we don't provide help and they shutter all the factories e.g. go bankrupt ; than what will the bill be for unemployment benefits especially if Congress extends the time period one may receive them? With million plus people involved such as at factories or dealers the billions involved may make us wish we tried salvaging the company. At least we know if coerced they can deliver some good R & D.

2008 Nov 26 11:47 PM