Why Selling Your GM Stock Makes Sense, Even If Bankruptcy Is Averted

General Motors (GM) is working with bond holders to try to avert a bankruptcy filing. There are reports this morning that an agreement on a proposed debt for equity swap may have been reached. For current GM shareholders the question is pretty simple: should you sell at the current price of $1.35 per share?

Well, if GM files chapter 11, shareholders will very likely be wiped out completely (there have been a few cases when they aren’t, but it’s very unlikely). But what if the bond holders agree to certain terms and the company avoids bankruptcy? Isn’t that possibility the sole reason GM shares trade at more than $1 right now, even though the company is effectively bankrupt?

The short answer is yes, but consider another fact. In the latest proposal made to bond holders, current GM equity holders would retain 1% of the newly restructured company’s stock. In order to make the case to hold onto GM stock today, one has to argue that General Motors equity, after the restructuring, will be worth at least $80 billion (100 times the current $800 million market capitalization). How would one even begin to make that case?

Comments

[seekingnorm...:]

Well, it would have to earn around US$11.4b (7x PE based on Toyota's FY08 earnings). That's about a 10.5% net margin (double Toyota's 6.5%) on consensus revenue estimates for 2010 of US$120b. So, we'd have to figure out whether the debt haircut would make that feasible.

Hope wise, GM's 2006 revenues were US$208b, Toyota's current share price is dampened by recent quarterly losses and getting ANY kind of earnings would probably result in the relisted stock being regarded as a super high growth high PE stock and miracle recovery story. With its size, it would probably be easy to justify a buy call based on these hopes.

May 28 11:22 AM

[Vladimir Se...:]

theoretically (and only theoretically) if obama puts 100B into new GM and new GM has no debt, it could have a market cap of 80B.
in reality, we all know that to end up with a million you have to start with two. so it will be more like 50B.
then you get the UAW strings attached and market cap goes straight to 1B.
stock is trading where it's at for a simple reason: pump and dump is going on. it's the usual penny stock game some people play.

May 28 11:27 AM

[Tom Colangelo:]

Please feelee to throw as much,,,I mean INVEST as much of your money as possible in the GM fiasco. GM will survive as a much smaller firm if only because the market has shrunk for the next 5 years. Way too much capacity in this industry.


On May 28 11:22 AM seekingnormalcy wrote:

> Well, it would have to earn around US$11.4b (7x PE based on Toyota's
> FY08 earnings). That's about a 10.5% net margin (double Toyota's
> 6.5%) on consensus revenue estimates for 2010 of US$120b. So, we'd
> have to figure out whether the debt haircut would make that feasible.
>
>
> Hope wise, GM's 2006 revenues were US$208b, Toyota's current share
> price is dampened by recent quarterly losses and getting ANY kind
> of earnings would probably result in the relisted stock being regarded
> as a super high growth high PE stock and miracle recovery story.
> With its size, it would probably be easy to justify a buy call based
> on these hopes.

May 28 11:43 AM

[Richard K:]

If any bankruptcy aversion deal is announced, there will be a short sharp price spike until people calm down enough to run the numbers. If I had a GM position I could afford to lose I might take a shot at selling into this spike but this is definitely one for the most nimble of traders.

You gotta ask yourself, do I feel lucky today?

May 28 11:49 AM

[fuzzy:]

If I had 10k shares of old GM stock will I still have 10k shares under the new GM?

May 28 12:02 PM

[babyray:]

Buy!! Buy!!! Buy!!!

May 28 12:40 PM

[dfalter:]

On May 28 12:02 PM fuzzy wrote:
> If I had 10k shares of old GM stock will I still have 10k shares
> under the new GM?

If you buy 10k shares of old GM stock.. you will continue to have 10k shares of old GM stock until they eventually get de-listed.

May 28 12:44 PM

[RLLH:]

Haven't they said they will do a 1/100 reverse stock split? I know they have said they are looking at it, don't know if it's a definite or not.

May 28 03:08 PM

[BeachRider:]

Buying GM right now is a dicey. GM won't go Chapter 7 (liquidation), so they will probably reorganize under Chapter 11. There are no guarantees to stock holders in Chap 11, you can absolutely get zero'd out. If there is enough value in the reorganization, they could preserve some value for preferred stock holders. With even more value, the could preserve some value for regular stock holders. Nobody really knows how much GM stock will be worth in a week, but it could easily be zero.

May 28 03:57 PM

[Richard K:]

There has been a suggestion that outstanding shares in Old GM will become shares in 1% of New GM. So if the total market cap remains the same, just change the dollar value of your holdings into pennies.

May 28 05:10 PM

[Dave Trader:]

You all seem to be missing the value play of the century.

Buy GM, pay the usual $25 fee for the certificates, hold and sell on ebay. This is history in the making. Plenty of people and instituations "own" GM, not many hold the certificates.

May 29 09:13 AM

[BeachRider:]

The avalanche has started. The latest Bloomberg news is that GM's bankruptcy filing will preserve no stock value. GM is under 80 cents as this is written, with 90 minutes to go...

May 29 02:24 PM

[Gerry Sullivan:]

One thing everyone overlooks is the value of the GM tax loss. At today's closing price, there is $69 in tax losses for every
70 cent share of GM. Of course, you have to own the whole thing and merge with a profitable company, but someone will want to do exactly that when all that remains is the GM corporate shell.

It all belongs to the common stock, nothing to the bonds, unions, US Government, etc.

Penn Central was the same. Wound up being controlled by the Lindner family, one of the richest in America.

May 29 05:11 PM