Bring Back the Old GM

I remember a time where this reader was very passionate about his GM (GM) vehicle. It was a 1969 Camaro…what a perfect car. The look, the part interchangeability, the performance. Boy what a vehicle, and man was I passionate about it.

Hear that GM? Where is the passion? The idea of connectivity to the vehicle? This company is in serious trouble. We are talking about the great American Icon that is close to losing its U.S market share leadership to a more nimble Toyota (TM). GM shares closed at $13.19 on Tuesday, June 24. Excluding dividend and split adjustments, GM shares are trading at an all time nominal low. With adjustments, prices like this have not seen since the early 90s recession.

Alas…the game is much different now. Eerily, the scenario is similar to issues Chrysler Corporation (DCX) was facing in the late 70s. Back then, Mr. Iacocca was at the helm lobbying for guaranteed loans to rescue the beleaguered company. He got them. Lesson there…no need to worry about a GM bankruptcy…you wont see it. No forced buyouts here…who will buy it? Toyota? That’ll be the day. LBO? Private Equity? HA! Unless GM reinvents the mini-van, no way will any financial model show accretion fast enough to satisfy PE…did I mention that LBOs are nearly impossible in this environment? I recall Blockbuster’s (BBI) response to Circut City’s (CC) buyout: “Sure if you can get the money…”

Yet we must give GM another look as it represents the perfect storm of fear that fantastic trading opportunities are made of. We can look at LT Debt issuance by GM, and this level had been quite high in the previous 5 years, averaging $80B since 2006. With the recent credit crisis, we have seen on a quarterly basis LT financing down to about $1B per quarter. Operating expenses are increasing more rapidly relative to revenues (naturally due to RM costs). GM is planning a huge rebate campaign, either in the from of 0% for up to 72 months or cash rebates (read: shrinking margins). The balance of Receivables relative to Payables, if called today, would leave GM with NO CASH. So lets look at the landscape: shrinking cash balance, reduced ability to leverage debt markets (due to shrinking liquidity combined with heightened costs for GM bond default insurance), no visible white knights short of the US government. Also, unlike Chrysler of the 70s and the 80s…no K-car or minivan on the horizon to generate sales volume. In fact, GM is shopping Hummer, slashing 170,000 light trucks and SUVs and planning to reinstate a car that was cancelled due to a shrinking market for it: the Camaro.

Needless to say GM has been woefully slow in catching the curve, much less being ahead of it. Check out the chart below from WSJ indicating U.S. market share:

 

 

 

 

 

 

 

 

 

So I am thinking long here for The General. Why? This company is NOT going bankrupt…mark my words. The reasons…who can (or wants to) buy them ($13/share*566m shares+shrinking market share+ no exciting products+suffering American automakers unwilling to take on capacity…you get the picture), political implications of an American Icon either going under or being acquired by a foreign entity, and boy are the shorts having some fun right now (18% short interest).

I like my derivatives…I am looking at the Jan 2010 $15 calls, trading at $3.7 at the ask. I am speculating that any chatter of cash infusion, government bailout, or, if you can believe it, better sales, will send the shorts running. Of course, there is the fact that this stock can get cut in half way before any up move is made, so I would take a position in Jan 09 $10 puts , at $1.73 ask, at 20% of the long position as a hedge. Implied Volatility is off the charts right now…so yes premiums are a little inflated, but we are paying for movement…that is how we make money. But big moves are in store for GM, good and bad. But in the end…we will be higher. The industry has battled inflation soaring oil and emerging competitors before, and will do so successfully again.

Disclosure: Author has no position in GM

Comments

[squashnut]

Did you just say GM will not go bankrupt because no one wants to buy them? Did you say "mark my words"?

Did you just post a chart of GM's stock price chart and call it their "market share"?

We will mark your words (this the internet, remember?) and if they go under your career as a blogging analyst is finished.

Did it occur to you that GM has been closing plants and that GMAC is insolvent?

[Alan von Altendorf]

Dan, I'm with you in spirit. All metal Chevy pickups, Chevy and GMC vans, 66 Impala, 78 Monte Carlo, I've owned and loved them all.

However a GM-Ford consolidation might be the least worst scenario.

[paulk8756]

I think you guys are on the money about GM being on its last legs. Even if it could, the VOLT won't enter production in time to save them. Only a precipitous drop in GAS PRICES (...duh!) could increase sales enough now to ward off their pending insolvency.

That latter point is curious to me... Here's Michigan, a state with a strong D heritage and a heavily unionized workforce, which they must have to win this fall's election, and the D's in Congress aren't lifting a finger to help them.

I guess they figure there will be plenty of time to bail out GM, or possibly nationalize the entire remains of the auto industry, once they get a D in the White House and further expand their Congressional majorities.

I suppose the D's now running Michigan, their D's in Congress, the unions, and even mangement are all sharing this dirty little secret, and getting ready to take their places on the Titanic in preparation for taking over this industry. And who cares... none of them will be paying for it anyway!

In any event, it sure beats haveing to BUILD BETTER CARS and trying to COMPETE IN THE MARKETPLACE, doesn't it...?

[Dan Tierno]

Hey squashnut

"Did you just say GM will not go bankrupt because no one wants to buy them?"

Yep that paraphrase is accurate. I feel the government will bail them out as pointed out in the article.

"Did you just post a chart of GM's stock price chart and call it their "market share"?"

Good Call!

"...and if they go under your career as a blogging analyst is finished."

Finished? Hardly, man. I will just be wrong :)

Needless to say it will be a fascinating scenario as GM and its divisions are rapidly approaching insolvency. We shall see what the result is.

It was easier to dismantle BSC...at least 50% of staff was taken on by JPM...the other half either have generous severances or the better ones can strike out on their own or go to niche firms in the area.

What if GM were to go under? What of those displaced employees? Who will absorb that additional capacity? There most certainly will be a public uproar if GM is allowed to fold without any gov't assistance...

[marketwatcher2]

Dan: You have a foresite many wish to have. Your on the money with GM. I'll follow your forecast.

It's a tough World Market out there. Most American's don't understand the World Auto Market. You my friend see it like it is. GM is an American Company competing with the World in it's home Market. If American's can't realize this Uncle Sam will teach them.

America is still America even if some think Foreign is American.

[marketwatcher2]

What no comment?....Actually I really think from what the politicians are preaching is GM won't need a bailout.......but if push comes to shove......Guess what GM is an American Icon in the World Market and Uncle Sam did have a hand in having them defend American Market Share in America against some very unlevel fields of play. Do the American Politicians and average Americans have a conscience? I think so....

[Dan Tierno]

Thanks Marketwatcher.

GM sure is looking more awful each and every day...and many more articles are propping up speculating everything from bankruptcy to GM rushing the Volt out to make a bailout more politically feasible...and in an election year no less!

It will be wild to watch...I for one want GM to stick around. Yes, capitalism is Darwinian in it's premise and maybe GM should fail for the efficiency of the industry as a whole. Furthermore, the Auto Industry has extraordinarily high fixed costs, and as such volume is the name of the game in order to spread those costs across more units. The rest of the industry would benefit from such a huge player eliminated.

But then, what of the wreckage...emotional, economical, political, and otherwise? One of the most enduring and most recognized brands on Earth...gone. An automobile manufacturer that through time has created identities for people and counties alike. Oh and by the way...266,000 employees.

Two Hundred Sixty-Six Thousand.

[marketwatcher2]

Dan:......I liked your web site......You have a view of the generalities of the world that are intertwinded and will lead you to success.......Good luck.

Two Hundred and Sixty Six Thousand and all the jobs they support.....Approximat... 12 times that many related to GM's Auto and Truck Industry........Huge loss America will not let happen.........Add Ford and Chrysler and the jobs they support and you have an economic catastrophy in the making.......Have a great 4th. Dan....

[Ames Tiedeman]

I think the 2010 Camaro will make you happy with GM again. Not that this model will save the company, but it is exciting to see GM build one like this.