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Early hopes of quick returns from General Motors' (GM) November IPO have been dashed, other than for those who already sold at the right time. The post-bankruptcy shares debuted in November at $33, peaked at $39.48 on January 6, and are at $31.58 as of the July 8 closing. So are the shares, with an extraordinary low P/E ratio of 5.58, a bargain at a sub-IPO price? My view is that the shares represent strong long-term value, but with considerable risk that they won’t go much above current levels for a while.
Reconstitution of management team is still early
GM’s management team drove the company off a cliff in the late 2000s. Just how early the company is in transforming its leadership can be seen by comparison to perennial competitor Ford Motor (F). When Alan Mulally came to Ford in 2006 after a 36-year career in aerospace, skepticism that someone from outside the auto industry could run a car company abounded. Five years later, Mulally is entrenched at the automotive giant he turned around, with Mark Fields, a career Ford executive tapped as executive vice president and president for the Americas just before Mulally arrived, now long established in a key turnaround role.
Though also from outside the auto industry, GM chairman/CEO Dan Akerson has had many stops in his career, working at MCI, Nextel (purchased by Sprint (S) in 2005), XO Communications (OTC:XOHO), and then at noted private equity firm the Carlyle Group. Consequently, whether he intends to serve as a long-term CEO is not yet firmly established. Akerson is also at a much earlier stage in positioning key insiders to lead the turnaround, having just appointed Mary Barra as senior vice president, global product development, in January. This is not to say Akerson is doing anything wrong, but that the leadership turnaround at GM is still beginning.
The truck inventory problem
The new “bad story” at GM is that dealers have too many trucks hanging around their lots, namely an inventory of 122 days in June versus 79 days for Ford. This spooks analysts because it seems like earlier truck down-cycles from high gas prices, which eventually helped sink the company. The current overstocks occurred at least partially because GM intended to build up inventories to meet consumer demand, but it may also be because buyers don’t want the trucks.
Corporate Average Fuel Economy ("CAFE") statistics maintained by the National Highway Traffic Safety Administration are illuminating. The average CAFE mileage of a light truck in the GM line up is 23.2 miles per gallon (mpg). For Ford it’s 24.3 mpg, Toyota (TM) 24.7, and Honda (HMC) 25.4. So it stands to reason that higher gas prices from the unrest in the Middle East, coupled with reduced consumer demand from the sputtering economic recovery, are to blame for the bloated inventories.
The future
There are many good stories about GM. The Chevy Cruze compact has been a hit, topping U.S. sales in June, a major milestone for a U.S. carmaker. A sub-compact Chevy Sonic is on the way; favorable tax treatment of legacy issues may provide billions in windfalls; and a host of other legacy challenges — including excess dealers, over-branding, and various union issues — have been substantially addressed.
But the truck problem may be around for a while, and that could drag on GM’s overall performance because light trucks have historically been more profitable per unit than small cars. The company intends to issue a revamped Silverado in 2014, and both GM and Ford will be hustling to meet a new 2016 30 mpg CAFE standard for light trucks. But for now, it’s hard to see GM shedding its competitive disadvantage on the trucks until late 2013 when the 2014 line up comes out.
How much of an albatross the truck legacy will be is likely to depend on macroeconomic factors. Obviously, improved consumer demand and lower gas prices would help. But the bottom line is that the truck line up makes GM’s shares more vulnerable to rising oil prices than Ford’s.
Conclusion: Short-term uncertainty, good long-term theory
In the near term, the light truck factor makes GM a bet that good economic news is on the way. In the long-term, the shares are a wager that GM can complete its management turnaround to plug the remaining legacy vulnerabilities. There is no glaring reason to believe it can’t; accomplishments from the bankruptcy provide a head start, and the truck inventories have brought the shares down to value levels. But the truck problem may drag or recur until revamped models debut in two-plus years, so the shares are best suited for patient investors.
Disclosure: I am long F, S.
Source: GM: The Long-Term Investment Case