Loading...
Symbols:
Authors:

General Motors: General Malaise

by: David Merkel July 09, 2008 | about stocks: F / GM / NSANY / TM    
David Merkel

David Merkel

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

I’ve never been a fan of General Motors (GM).  At RealMoney, I had somewhat more than 70 notes on GM across five years, though I stopped writing about it because I got bored  waiting for the disaster.  Oh, also, the market moved temporarily against my views, and I had better things to write about with the pains in depositary  and credit-sensitive financial stocks.

One of my basic rules is that heavily indebted corporations with bloated cost structures facing stronger competition are rarely good investments. How will the equity get dividends?  Who would buy the company out?

You can’t cut your way to greatness, particularly when there is high debt and high overhead costs.  Those costs need to be spread over a large volume of cars/trucks.  Cutting volume will not help much, except for cash flow in the short run.  In the long run, the accrual items will bite, whether pensions or other fixed obligations.

As Felix points out, bankruptcy may offer options.  That said, the surviving company would be much smaller and less significant to the US economy.  I also doubt that Chevrolet could be spun off without a fraudulent conveyance suit from the senior bondholders.

When I was a corporate bond manager, I sold all of my inherited GM exposure at significantly over par in 2001 (spreads were under 200 bp).  I did not want my clients to face the degradation of value from a mismanaged company.  Not owning GM and owning a tiny amount of Ford (F) debt was a big bet relative to the indexes, but it was one that paid off.

My advice remains the same.  Underweight GM and Ford, both equity and debt.  It may take a while, but eventually the overindebted companies with high fixed costs will be outcompeted by their Japanese rivals.

Related Articles

This article has 15 comments:

  •  
    Jul 09 08:53 AM
    When does this stupidity end? GM has a very bright future. First look at the overseas business. It's booming!!!! Next, look at how quickly this company is reacting to the current dramatic change in the market. As a veteran of 30 years in this industry, GM used to take YEARS to react. Now they can change within weeks. And PLEASE stop lumping GM and Ford together. The situations are completely different. FORD has put up the entire company including the Blue Oval as collateral on its loans!!!! GM will survive and eventually prosper. Ford and Chrysler are quite a different story. Why don't you write about Toyota and their
    Tundra-Texas factory fiasco. How about how much the Europeans are losing money on their American sales due to the crappy dollar? If you went out into the marketplace and compared the quality of the various vehicles, you would have a very different tune. Try the Peter Lynch theory of actually getting out of the ivory tower and going among the masses. It will open your eyes!!!
    Reply
  •  
    Jul 09 10:41 AM
    its easier to sit in the ac office & pontificate as hundreds do it everyday. if they really knew they would not have to.
    Reply
  •  
    Jul 09 12:01 PM
    you have consistently said bad things about the us auto industry. you indicated as well as other media mavens that June sales for toyota would exceed GM sales for he month of June 2008. If the figures are correct,sales of GM exceeded toyota in the US by 70,000 vehicles in the US. If you take into account that GM and Ford were never able to sell any cars in Japan due to restrictions set up by the auto industry and government in Japan,you would stop criticizing GM and Ford and start promoting their products. Toyota sell app 2 million cars in Japan.How many does GM and Ford sell to the Japanese. if you think that the Chinese are controlling their currency against the US,what do you think Japan has been doing for last fifty years. If Gm and Ford were to fail,American workers and manufacturers would be in serious trouble requiring a bailout of enormous proportions and would make the Chrysler bailout look like childs play.
    Reply
  •  
    Jul 09 01:03 PM
    I agree with the first writer. GM Is doing gangbuster sales overseas. In 2009 or 2010, their legacy costs will in some ways be reduced due to many retired UAW workers dying off. Give them time and I think they will be OK. Getting rid of Buick and/or Pontiac, Saab, etc. might be worthwhile.
    Reply
  •  
    Jul 09 06:47 PM
    If i were gm i would concentrate all my energy on building up Saab and going after honda and toyota with it. the same way lexus went after mercedes benz.

    Us young people would start buying them. As soon as we hear chevy impala or malibu we roll our eyes and look the other way. i don't care if it flys, we don't want 900 year old regurgitated junk. we want google and apple on wheels....
    Reply
  •  
    Jul 09 07:34 PM
    david is right. GM has survived these many years solely on the strength of its past greatness. It is and has been saddled with debt. Even if someday they were to make consistent profits, the gargantuan debt would crush them. Better to declare bankruptcy, sell assets, slim down, unwind the debt and start fresh.
    Reply
  •  
    Jul 09 07:49 PM
    I have only GM and Ford autos because I believe in buying American. I have a 1951 and a 2001 Chevy truck and a 2007 Mustang. If America truely wants an economic stimulus package, then quit bitchin' about Congress and buy an American car or truck.

    That said, GM, Ford, and Chrysler learned nothing from the gas crisis of the 1980's. The need to fire all of their car designers and hire some from the far east who know something about fuel economy and style.
    Reply
  •  
    Jul 09 11:28 PM
    GM should keep Chevy and Cadillac and cut Buick down to one car (Lucerne), Pontiac down to one (G6), GMC down to one (Sierra), Saab out all together, and Saturn down to one (Vue). Next, GM needs to cut its staffing starting with the unclassified employees. These should be cut by 70%. These are GM's highest paid employees. They should then cut middle level employees and try and keep almost all of the lower employees who do not get paid that much.
    Reply
  •  
    Jul 10 01:28 PM
    I agree for the most part with the author. I also worked in the US auto industry for some years before leaving. GM should stand for General Mediocrity. Ford is the same when it comes to lack of execution. Both of these companies continue to provide great inspiration for Dilbert comic strip material. Out of all the problems and challenges they face, the worst is the bloated and mediocre middle and upper management and lack of Executive talent. You could fire up to 50% of middle management and it would probably have no negative impact on productivity. In fact, productivity may even improve since many of the bureaucratic bottlenecks would be removed. There are a lot of hard working folks in this industry but like Dilbert most are working hard on projects that add little or no value to the core business. And based on my experience, I completely disagree with the first poster who sounds like the typical 30 year veteran. GM and F still take months to years to react to market changes due to all the bureaucracy. It is virtually impossible to have anything significant approved or accomplished in weeks. Worse yet, it takes just as long to undo bad decisions that already took way too long to implement in the first place. This is why I left the industry. Out of sheer frustration. Only the airline industry is more mismanaged. Yes their products have improved but so has the competition. There is still a gap and the only people that can't seem to acknowledge that fact are the old guard that is still running the show and running the company into the ground in the process.
    Reply
  •  
    Jul 10 03:00 PM
    I believe the American dream is dying with GM and Ford and you should all wake up and see what the final cost of buying all the imports from Japan and China is doing to this country. If you think Ameican cars don't match in quality you should go take a test ride or rent one for a few days. You will be surpised how great these new cars are.
    All the money being spent on forgien produced cars are taking away a huge amount of great paying American jobs. These jobs help form the middle class of America. These lost wage earners will not be investing in American stocks for their retirement funds so all those wall street wizards are just cutting their own throats and destroying a great way of life. BUY AMERICAN BUY AMERICAN BUY AMERICAN
    Reply
  •  
    Jul 11 09:03 AM
    I can understand the reaction to saving US jobs but if the most patriotic must accept that the big three have managed to ignore all the signs that oil was going to become more expensive and ,eventually, will run out.

    Given the European expertise for GM and Ford in small economical cars it simply compounds the amazement one feels for incompetence at the top. Now to be fair the US public has enjoyed being taken up the garden path to larger and larger vehicles so the industry might argue commercial logic took them there. I will ignore the idea that they lobbied to prevent increased mileage requirements being imposed by Congress - you can all decide if that occurred or not.

    However GM and Ford have been in position to have a plan B based on existing European cars for decades. The likely need for Plan B has been rising for some years to the point it was a galloping certainty.
    The number of non- US cars that will do 50mpg on a combined cycle probably runs into the dozens.
    Reply
  •  
    Jul 12 11:53 AM
    hoffman23, you're ignoring the facts! Check out the financials for GM: it's pretty clear that the company is in serious trouble.

    I don't accept that GM reacts quickly to change; at least, I don't see any evidence to support the claim.

    The quality argument is a myth. For example, if you check out the JD Power website, you'll see that the big three receive the first place ranking in dependability in only five out of nineteen categories. Read the survey results from Consumers Union and you'll see that the Big Three perform much worse. The quality may have improved, but it's still not on par with competitors.

    For the record, Peter Lynch may have advocated buying what you know but he insisted on looking at the financials of companies too.


    On July 9, hoffman23 wrote:

    When does this stupidity end? GM has a very bright future. First look at the overseas business. It's booming!!!! Next, look at how quickly this company is reacting to the current dramatic change in the market. As a veteran of 30 years in this industry, GM used to take YEARS to react. Now they can change within weeks. And PLEASE stop lumping GM and Ford together. The situations are completely different. FORD has put up the entire company including the Blue Oval as collateral on its loans!!!! GM will survive and eventually prosper. Ford and Chrysler are quite a different story. Why don't you write about Toyota and their
    Tundra-Texas factory fiasco. How about how much the Europeans are losing money on their American sales due to the crappy dollar? If you went out into the marketplace and compared the quality of the various vehicles, you would have a very different tune. Try the Peter Lynch theory of actually getting out of the ivory tower and going among the masses. It will open your eyes!!!
    Reply
  •  
    Jul 12 04:12 PM
    Right now American consumers don't care if a GM car gets JD Powers awards for quality coming out of the wazoo. Right now they care about fuel economy, and that's where the Japanese cars are trouncing GM.

    Chevy's commercials say they have a line up with more cars that get 30mpg than other makers, but that's misleading. 30mpg HIGHWAY only. If you factor in city mileage, even the Chevy Aveo (which is made by Daewoo in Korea by the way, not here in the U.S.) gets only 25mpg.

    Meanwhile, Toyota has Yarises and Corollas that can get 30mpg COMBINED, ditto Honda with their Civics and Fits.

    Why should the American consumer keep buying GM cars if they can't match the fuel economy of foreign cars to prop them up so GM has no incentive to change? That's corporate socialism at its very worst.

    Reply
  •  
    Jul 12 11:09 PM
    GM is dominating in China. All of their smaller cars in the US are sold out. Come out to Texas, we will NEVER give up GM Trucks in TEXAS!
    Reply
  •  
    Jul 14 08:19 PM
    Americans are influenced by the media, car and consumer magazines and educators. Many of these have a bias against things american. Our automobile indutry has been instrumental in creating some of the most beneficial improvemente in the entire industry for the past 100 years. If we and our culture are so inferior why do so many foreigners seek to come here to study, work, and live? How many Americans do the reverse ? Our car companies have made mistakes. But how many of us have given them the wrong signal about our intentions? Are we somewhat to blame? If Chrysler survived the 80s GM & Ford will survive the millenium. Some of us do not mind biting the hand that feeds us. But sooner or later that will come back to haunt us. It is no sin to buy American. I do and will continue to do so.
    Reply
More Comments on GM ยป
More by David Merkel
Articles on related themes
Autos
Aircraft & Parts
Airlines
Rail Transport