There seems to be talk going around that General Motors (GM), the carmaker bailed out by the Obama Administration, is once again headed for bankruptcy. An article written for Forbes claims that GM is losing market share, makes inferior products, and is destined to be in need of a second bailout. The article's author, Louis Woodhill, has written under his name the tagline "I apply unconventional logic to economic issues." I don't know what "unconventional logic" is supposed to mean, but in this case it seems to be a complete ignorance of reality.
First of all, anyone claiming "Company X is going bankrupt" without even talking about the balance sheet is full of something other than good ideas. GM has $33.5 billion in cash and another $7 billion in investments, compared to about $15 billion in debt. There is a large pension obligation, but looking at this balance sheet the last thing any reasonable person would think is "bankruptcy." The TTM interest payments are $464 million compared with TTM free cash flow of about $1.1 billion. Yes, GM is losing money in Europe. But so is Ford (F). Europe is not a GM-only problem, but it is a temporary one.
The author's main argument is that GM's market share has shrunk. Indeed, Toyota surpassed GM as the world's number one carmaker this year. Can only one carmaker be profitable? Why does no longer being number one entail bankruptcy. Well, It doesn't. Another argument put forth by the author is that Car and Driver rated the Chevy Malibu poorly. Why the opinion of a magazine on a single product is grounds for bankruptcy talk is beyond me. It becomes clear reading the article that the criticisms of GM, however valid they may be, in no way lead to the conclusion of imminent bankruptcy. This is a propaganda piece, plain and simple, drawing absurd conclusions from cherry-picked data. This is the kind of advice that will lose investors money.
Pessimism of this sort has driven GM stock down near $20 per share, off considerably from the $33 IPO price. This argument is also raised in the article, confusing stock performance and company performance.
GM at these levels should be welcomed by investors as a chance to buy the company at a discount, not a sign of doom. I recently wrote about GM and valued the shares at a minimum of $25 per share. Berkshire Hathaway (BRK.A),(BRK.B), lead by Warren Buffett, recently disclosed a 10 million share stake in General Motors. Berkshire Hathaway doesn't buy companies on the verge of bankruptcy. And by buying GM, neither will you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
