General Motors (GM) is the world's second largest producer of cars and trucks. GM declared bankruptcy in June 2009, effectively transferring the invested capital of the existing shareholders and bondholders to the US Treasury (who gained a 61% interest in GM). GM went public again in November 2010, selling 478 million common shares at $33 each. The last time GM shares closed above the IPO price was on May 4, 2011.
At the time of this article, GM's current price was $31.81 - close to its 52 week high of $32.44 - with a current PE of 10.93, a forward PE of 7.35. GM does not pay a dividend.
Why GM is a Sucker Bet
The definition of a "Sucker Bet" is a gambling wager in which the expected return is significantly lower than the wager(s). Sucker bets are often created to lure inexperienced players into betting against large odds, blinded by the offer of "fast money".
- Subprime Revenues and Delinquencies are Increasing
- Per the latest quarterly filing by GM (see link here), the average credit quality of a GM customer is deteriorating. The below table details this trend:(click to enlarge)
- The delinquency rate is also increasing:
- The repossession rates will likely increase as the vehicles age and require more maintenance and repair costs that are not covered under warranty. These repossessions will likely have less value as they will likely be abused before repossession occurs and the borrow will care less as they have a poor credit rating for a reason.
- Dodd-Frank Regulation does not Cover Auto Loans
- As a result of lobbying by the National Automotive Dealers Association (NADA), the auto financing process was in large part excluded from the Dodd-Frank regulatory requirements. Per the NADA "The Dodd-Frank Wall Street Reform legislation includes language that preserves dealer-assisted financing, which will continue to provide more convenience, more competition and more choices for car buyers."
- The exclusion of Dodd-Frank regulation from a government controlled business was not an oversight, but part of an agenda to keep GM revenues elevated until the US Treasury can exit their equity position.
- Sales in North America and Europe are Declining
- Per the New York Times, overall auto sales in Europe fell in March 2013 for the 18th straight month and new vehicle registrations fell 10.2% from a year ago.
- North American auto sales for the month of April were under 15 million units, the first time since October 2012 and the largest % decrease also since the same month. (See link here).
- US Treasury Ownership Keeps Floor on Stock Price
- While the US Treasury has shrunk it's ownership of GM from 61% to the current 18%, the ownership by the government has created an incentive to keep the stock price elevated for political purposes. The sale by the US Treasury of its remaining portion of GM stock will likely deteriorate the stock price and at the current stock price it will also cost the US taxpayer approximately $11 billion.
- Underfunded Pension liabilities
- As of 12/31/2012, GM's underfunded pension liability was $27.8 billion. This is an increase of 9.5% from 12/31/2011 when the GM's underfunded pension liability was $25.4 billion. The current underfunded pension liability is approximately 64% of the market capitalization of the company.
Sales increases in China may offset the sales declines in North America and Europe. GM may also be able to offload its pension liabilities to Prudential or another insurer.
Based on the above attributes, General Motors is a speculative gamble at best. GM's current strategies are to pay off the government in the short term and to shore up or offload its pension liabilities in the long run. Neither of these strategies have shareholder interests in mind. Given the history of management to destroy shareholder and bondholder equity, this stock should be avoided on philosophical grounds alone.