By Robert Gordon
With a company as large and complex as General Motors (GM), there is no such thing as everything going simultaneously right or wrong at the same time. It is all a question of balance, and for the rest of 2012 and on into 2013, I expect for the good to narrowly outweigh the bad.
The General Motors I am discussing today is not yet three years old. In 2008, after tens of billions of losses, uncompetitive labor agreements, a bloated cost structure, undesirable products, and grossly unfunded pension liability, the Bush administration gave the old General Motors a $9 billion loan. Soon after, as the economy continued to sour, the Obama administration forced General Motors into a controlled bankruptcy, from which the indebted company spun off its Chevrolet, Cadillac, GMC, and foreign assets such as Opel into the new General Motors in mid-2009. So, there is a limited history to look upon.
In 2011, General Motors reclaimed its title of the world's largest automaker, selling some 9 million units. Earnings for the company came in at $7.6 billion, or $4.58 per share, a 62% advance from the $4.7 billion, or $2.89 per share recorded in 2010. About $0.70 cents of the 2011 earnings were from non-recurring events. Revenues increased 11% on a year over year basis, to just over $150 billion.
he bad news is that virtually all that profit came from its North American operations. South American operations netted about $800 million in 2010, but swung to a loss of about $100 million in 2011. Europe continued to be unprofitable with a loss of over $700 million, largely due to economic woes in the continent. General Motor's Asian and African operations continued their growth and profitability, with pretax earnings of $1.9 billion, compared with $2.3 billion in 2010. One gets an obvious sense of the importance of General Motors' North American market, to be sure.
What is going well right now for General Motors is product. And frankly, that had been the old General Motors' greatest weakness in the 15 years before its bankruptcy. The old days of giving absurd $5,000 rebates just to get cars off dealer lots seems long gone. The average domestic sale of General Motors cars and trucks in March, 2012, was $33,289, nearly 4 percent higher than the same month in 2011. The average car and light truck sold in March in this country averaged an EPA rated 24.1 miles per gallon, an all-time high. General Motors, in recent years, has introduced totally new, fuel efficient vehicles such as the Sonic and Cruze.
But the highlight of the General Motors line up is the Chevrolet Volt. General Motors had a modest target of selling 10,000 Volts in 2011, a total it missed by about 2,300. General Motors had believed this one vehicle would lend the company actual expertise in a wide range of engineering and technology disciplines, as well as increase its "green street cred." Unfortunately, that has not happened, and very recently an explosion occurred at a battery research facility, which caused several severe injuries.
General Motor's balance sheet looks better than the old General Motors had in many years. It shed enough debt in the bankruptcy so that at year-end 2011 debt was just 18% of equity. Its defined benefit pension plan is nearly 90% funded, and it is unlikely to ever again be as underfunded as it was a few years ago, as General Motors is getting out of the business of offering defined benefit plans for salaried employees, effective this September.
The U.S and Canadian governments still own a combined roughly one-third of General Motors. The U.S portion, at least, has a break-even price of about $56 per share, a price that General Motors is years away from reaching. I do not look for great things from General Motors in 2012. Yet, if it continues spending heavily on research and development, an $8 billion investment is expected in that arena this year, the company has a bright long-term future. Given the Federal Reserve's commitment to low interest rates through 2013, I look for that to be a record year for the company.
Ford (F) is General Motor's chief competition at this time. Ford's products are the most critically acclaimed of any American company. But the majority of Ford's hefty fourth quarter profit, or indeed, its annual profit, was from one-time factors. Take away the $12.4 billion in tax loss benefits recorded in the fourth quarter of 2011, and Ford's earnings were $7.89 billion, or $1.95 per share. The idea that the stock is trading at a price to earnings ratio of 2.5 is silly and based upon the enormous accounting credit. The actual profit for 2011 represented a 2 percent advance from 2010, and nothing to get excited about. What is exciting about Ford is the goodwill it continues to engender from neither going through bankruptcy, nor seeking government assistance during the recession. I love the company's management and product line-up, and for the first time since 2006, the company has more automotive cash than debt, and has a bright 3-5 year future.
Another company that I like even more than the domestic auto companies is Honda (HMC). Honda has a long history of building highly rated automobiles, motorcycles, power equipment, and even small jets. Analysts see earnings, which were impacted substantially by the earthquake and tsunami in Japan last year, essentially unchanged in fiscal 2012, and then leaping up by more than double in fiscal 2013. Honda stock offers the best dividend yield in the group at 2.0%, and the company has the most defined long-term earnings growth potential here. Yet, the stock is currently already contemplating future earnings, and trading at an absurd price to earnings ratio of 28.8. If Honda were trading at a realistic price to earnings ratio, or a decent 5-year PEG, I would recommend it without reservation. But with the PEG being an astronomical 8.5, Honda screams of being overvalued at this time.