By Steven Edwards
"Bin Laden is dead, and GM is alive," was one of Vice-President Joe Biden's bigger applause lines at the Democratic convention. Indeed, the administration-led rehabilitation of General Motors (GM) saved many thousands of jobs and probably won for Obama the important swing state of Ohio, where one out of eight jobs is dependent on the auto industry, as well as Romney's home state of Michigan, where Detroit is finally beginning to rebound.
But, unlike the TARP bailout, the taxpayers are still losing money on "Government Motors." At the IPO price of $33, Uncle Sam received back only $11.7 billion of the $49.5 billion they invested in GM equity. GM would love for the U.S. to sell its remaining stock, removing government caps on management salaries, but at the current price of $24, the government isn't selling, not wanting the taxpayers to take a bath.
Does the decline from the IPO price mean that GM is now a buy? The IPO road shows emphasized GM's leading share of the Chinese market, as well as its revamped line of new models, including the plug-in electric Volt. GM has returned to profitability and appears to be selling lots of cars. Though the stock market has reassessed GM's prospects since the IPO, the stock is up 20% this year to date. Below, I list some reasons why GM faces headwinds that are likely to weigh on its stock.
The website zerohedge.com, while given to conspiracy theory and goldbuggery, nevertheless does some good muckraking reporting, and it has done a regular series on GM's practice of pushing inventory out to dealerships so that it can report high rates of production. The practice has led to a class action lawsuit alleging that GM misled investors by claiming that proper inventory controls were in place. Of course, unstuffing the channels usually requires steep discounts, and cannibalization of future sales.
Being the market leader in a crumbling market means that you have that much more to lose. Estimates of Chinese GDP growth keep falling. Even though China's economy is still growing faster than most developed economies, it does so by what would be perceived in the West as huge misallocations of capital. Production in China is less about producing useful goods and more about keeping its restive population employed. Block after block of vacant apartment buildings, bullet trains to nowhere, bridges that fall down shortly after they're built-these are all de rigueur in China. And the Chinese auto industry is the mother-of-all-channel-stuffers. Dealers are literally forced to take inventory-capitalist notions of profit-and-loss being an anathema in still-Communist China. It is questionable whether GM can keep selling in China profitably under these conditions.
Problems with the Volt
The Chevy Volt, on which GM has pinned such high hopes, has not been a great seller. Only around 7100 were sold in 2011, and sales are only about 13,000 so far this year. A monthly record was set in August, when 2800 were sold, but only because the company discounted the cars by a steep $10,000 per car. A Munro and Associates study suggests that GM is losing as much as $30,000 per car; so basically they are selling them for half of what they cost to produce. Some of those costs, of course, represent the billion dollars that went into research and development, which might eventually be amortized if enough Volts or other GM electric cars are eventually sold. But it is not like the Volt has no competition. Nissan has the all-electric Nissan Leaf. Ford (F) has an all-electric version of its Focus, in addition to high mileage gasoline versions. Electric car pioneer Tesla (TSLA) has its Model S, in addition to the high-end Roadster. Toyota (TM) has a plug-in version of the original hybrid, Prius. It is expected that there will be 20 different models of plug-in electric vehicles on sale in the U.S. within the next two years.
Comparison with Ford
GM is the sixth largest holding by hedge funds, the only auto company among the top ten. Ford's stock has lagged GM's performance this year by a large margin. If I was a hedge fund manager, and I had to choose a major U.S. automaker, I would switch to Ford. Both stocks trade at about eight times this year's earnings, and six times next year's estimated earnings. But Ford doesn't have a big overhang of stock held by the government, it doesn't have nearly the China exposure (although it has been hurt by Europe), it is not being sued for channel-stuffing, its sales growth in the U.S. lately has been greater than GM's and its Fusion hybrid gets 47 mpg, nearly as good as a Prius without being so ugly.
Of course, I am not a hedge fund manager and I don't have to buy stock in any automaker at all, and at this point I don't think that I would. In 2013, the sales of autos are expected to moderate in the U.S. and continue to drop in Europe. It is difficult to know what to make of China, since car companies there report only their sales to dealers.