Valuing GM: $28 One Day, $7 the Next?

Academic studies have found that Wall Street analyst stock recommendations trail the market and do so with more volatility. As a result, investors who use sell side research should be careful to pay attention to certain data points that analysts have spent hours putting together, but to completely ignore price targets and ratings and instead coming up with their own opinion on the ultimate value of a stock.

The latest example that illustrates this point is the call we got out of Merrill Lynch (MER) today. Merrill's auto analyst downgraded shares of General Motors (GM) from "buy" to "sell" and slashed the price target from $28 to $7 per share. That's right, this analyst thinks GM is worth 75% less than it was 24 hours ago.

As for how to value GM, I think it is simply too difficult to do so. It is nearly impossible to estimate future legacy costs, and trying to figure out what a reasonable profit margin on cars should be is simply a guess because the company is not even making money at all and its competitive position has deteriorated since it was last in the black.

Besides, if an analyst can tweak its model and get $28 one day and $7 the next, that is a pretty clear signal to me that valuing GM right now is just not something anyone can do with a large degree of confidence.

Anybody think GM is a buy at 10 bucks? If so, why?

Full Disclosure: No position in GM at the time of writing.

Comments

[ponchovilla]

Looks to me GM is upside down just like most of their potential customers with gas guzzlers. It's worth $10 for one share as a reminder of how things can go wrong ... very fast. A cheap lesson.

[Alan vonAltendorf]

I bought at $11, will continue to buy GM at $10 or $9. See David Fry's comment today about serious trouble just over the horizon. I share that intuition. GM is a strategic military asset.

[thepaz]

I agree, from 28$ to 7$ in a day on a hunch? Lets not forget after this summers shutdown G.M. goes back to work with allmost 19,000 workers off their active books. Thats not chump change they will be saving on a daily basis. Buy now, by Sept. G.M. might just surprise everyone.

[ValueBuyGM]

My assessment is you either a) think GM is going bankrupt, which they may, or b) we will look back at this overreaction in a few years, not to mention 5 or 10 years, and many folks will be kicking themselves for not loading up on the General. In spite of their well-deserved criticisms, GM is actually, FINALLY building some cars that more people may want to buy! (Caddy CTS, Chevy Malibu, C6 Corvette). They have a long way to go, but Wagoner has shown that he is a fighter. GM will be back! BUY!

[BS Detector]

I wouldn't suggest buying GM common. Preferred maybe. They have some interesting NYSE-traded bonds which are now quite deeply discounted because of the risk of insolvency, and are paying on the order of 18%-21%.

[Donald E.L. Johnson]

Jan 2009 10 calls say the stock will touch or exceed $13.50 before expiration, puts say $7. Call open interest 1,633 contracts; puts, 266,039.

Jan 2010 15 calls, $17.50, puts, $7. Calls OI, 7,386, puts, 52,423.

Bears definitely are in control and betting on $7. The options market is where Merrill probably got its target price.

[User 169775]

ValueBuyGM:

I have to disagree. The Caddy CTS, Malibu and Corvette might be nice cars, but GM is NOT going to be able to survive with a lineup like that, not in this day and age of $4 / gallon gasoline (heading up to $5 / gallon pretty soon).

The CTS and Corvette gets 20mpg combined highway/city. The Malibu gets 25mpg combined.

Meanwhile, Toyota has a lineup of cars that can get 30mpg combined or better (Corolla, Yaris, low-end Camry, Prius).

What GM needs to survive is put out a full lineup of cars that can get 30+ mpg COMBINED (not just highway), and we aren't seeing that. Hate to say it, but a Chapter 11 for GM seems more likely as each day passes.

[Donald E.L. Johnson]

I don't think GM or Ford will go bankrupt. President Obama and congress will bail them out, force the unionization of their competitors' American plants and inflate the economy, interest rates and the dollar. That will make GM and Ford cars more price competitive.

[User 169775]

Inflation will make GM and Ford cars MORE EXPENSIVE in its biggest markets (the domestic market), not cheaper. It will make exports cheaper for other countries to buy, but GM and Ford largely produce their cars for overseas sales in those regions, not in the U.S..

What GM and Ford need to do to make their cars competitive in the U.S. market is to make them MORE FUEL EFFICIENT. They are ALREADY price-competitve, seeing how there are $7000 worth of incentives for GM gas guzzlers like the Suburban, but sales for these gas guzzlers are still down.

Fuel efficiency is the key.

[User 149053]

For those who have no idea what the lead time is to produce a new car, I have a little insight. Three years minimum, if you pull out all the stops. Any one remember what the price of gas was three years ago? Under $2. The public wanted larger cars, they were profitable and 20 mpg was a reasonable average. Gas has doubled since then (most of it in the last 8 months) so everyone is calling for mpg to double to a min of 40, while at the same time throwing stones at the big three. If you know anyone inside the industry, with knowledge of future products, that will talk (usually a very closely guarded secret for obvious reasons) then you would hear of new products that will blow your socks off at mpg averages that are even greater than we are crying for now. Even Toyota, who most wallstreeters seem to thing walks on water, missed the gas price run up, otherwise they would be building a whole lot more of the Prius and fewer SUVs and pickups. That is why their sales were down even more than GM or Chrysler, and they are throwing out a good number of their American team because of it. I agree with ValuebuyGM's comments as they come the closest to what most insiders believe. Maybe the price crisis is for the best in the long run, because it forces alternative fuel and higher milage cars to market sooner than would have happened otherwise, and that will eventually drive down prices or at least prevent an even higher run up. Some of the market share lost by the big three was richly deserved because of past sins, but the new leadership is very capable and driven to bring the industry back to profitably. I for one am using the low price levels as an opportunity to buy and hold!

[User 169775]

The problem with GM is not lead-time-- It's the fact that they had NO fuel-efficient lineup to fall back on.

Even though Toyota's sales are down because they lost their bet on SUVs by introducing gas-guzzlers like the Tundra at such an inopportune time, they still have a fuel-efficient lineup to fall back on. Ramping up production of their existing 30mpg+ lineup is just a matter of increasing capacity rather than having to design everything from the ground up.

GM had NO foresight to have "plan B" to fall back on unlike Toyota. And the "blow your socks off at mpg" Volt is merely an attempt at catch-up, seeing as how Toyota will be to market AT THE SAME TIME with its comparable plug-in Prius (2010).

Now GM are facing negative equity where they will owe more money than the value of the stock, which means the shareholders WILL be the first ones to be left without a chair to sit on when the music stops. Personally I think it's a foolhardy time to be playing musical chairs by buying GM stock.