Investing: GM vs. Toyota

[Ming]

G.M. vs. Toyota
By CONRAD DE AENLLE
October 31, 2004
The New York Times

GENERAL MOTORS is the world's largest carmaker, but it is not even close to being the most valuable. At current prices, you could buy all of the company's shares if you had a spare $22 billion; Toyota Motor, by contrast, which makes about 30 percent fewer vehicles, would set you back about $140 billion.

In a choice between Toyota and General Motors shares, many investors have bid up Toyota's sticker price out of faith in its ability to operate more efficiently and profitably than its American rival. Analysts say that this results from financial burdens facing G.M., as well as from better production methods and better cars that Toyota has developed over the years.

The valuation discrepancy widened this month, when G.M. reported substantially weaker third-quarter earnings than analysts had expected; the company also warned that earnings for the full year would fall short of its estimates. The stock fell 6 percent immediately after the announcement. Over the last 12 months, G.M.'s shares have fallen 28 percent, while Toyota's American shares have risen 30 percent.

But does the drop in G.M.'s share price make the stock a bargain? Not in the opinion of many analysts and fund managers. Many professional investors say that they would still rather hold Toyota than G.M., just as a driver might prefer to own a luxurious new Lexus over an old Chevrolet, no matter how much more the Lexus costs.

Analysts say Toyota's innovations help give its stock an advantage over G.M.'s.

"The problem with G.M. is that earnings per share haven't grown in 10 years; at Toyota they have grown fivefold," said Tom Elliott, a strategist at J. P. Morgan Fleming Asset Management in London. He said that Morgan held neither company in its global portfolios.

G.M. must deal with some expenses that Toyota doesn't have. Mr. Mills says G.M.'s labor costs are "much higher" than Toyota's, and Edward Maran, associate portfolio manager at Thornburg Investment Management in Santa Fe, N.M., notes that G.M.'s employees will remain a financial burden after they retire.

"G.M. is in a very difficult situation," Mr. Maran said. "It has huge pension liabilities. Toyota doesn't have that problem." Toyota has much smaller pension obligations.

G.M. also has heavy obligations of another sort, Mr. Maran said: well over $200 billion of debt. Most of this is on the books of its financing arm and is matched by money that buyers of G.M. cars owe the company. But as any banker knows, not all of that money will be paid back.

"There is no question that the valuation on G.M. would appear cheap, trading on a low-single-digit price-earnings ratio and less than price to book," he said. When a company trades for less than its book value, its stock is worth less than the value of all its assets, including real estate, manufacturing plants and equipment and unsold inventory.

Despite these investors' preference for Toyota, some can make a case for buying G.M. They say, however, that this is a lukewarm endorsement.

A long-term investor may want to take a chance on General Motors because Toyota's prodigious progress may flag someday and G.M. may regain its footing.



Full Article Source: http://www.nytimes.com/2004/10/31/bu.../31toyota.html

[powervette]

TOYLETA

[paul3230]

Originally Posted by laserwizard

I had seen a similar article a while back. The other article had pointed out that Toyota was worth more than all of the former big three combined with room left over based on stock valuation.

Toyota, based upon current performance, is definitely valued correctly and worth every penny of their stock price. I would still contend that GM is overvalued because they face that sticky issue of union-pressed-coerced-healthcare benefits and retirement that acts like concrete shoes in the ocean of the automotive business. Saddle that huge cost of health care and retirement with a still obtuse to the reality of the automotive business management team that GM has, and there isn't much hope for the overall GM business situation to improve. What is sad is that there are pockets of GM that are run by car guys who know car lovers and give the public cars that are great. In North America, we have guys who are rebate specialists (and probably former World Book and Fuller Brush salesman) who couldn't tell the difference between a hubcap and a rearview mirror. Certainly the infusion of the design-challenged Bob ***** hasn't helped one iota. His new designs are characterless, dull, and often half-baked as if designed by committee. There is not one ounce of soul in most GM cars and the ones that have soul (like the Corvette are the exceptions and not the rule).

GM must abandon the pursuit of marketshare at all costs and concentrate on giving the customer great cars with eye-pleasing exterior designs and with interiors that don't look like they ran out of development dollars when they got to the interior. GM must abandon their rebate philosophy and start concentrating on marketing their cars and being concerned about their customers. Each division must have its own identity with its own UNIQUE attribute and no longer should any division share anything with another. No more CSV's or Equinox-to Torments. No more TrailBlazer to Buick to GMC. Cut models, make unique ones, and turn Saturn into the Import Division bringing the world's best GM non-north american cars into their showroom at no haggle pricing using their superb selling apparatus. Their cars will be unique, will be import fighters with imports, and will be able to bring in what is hot from the rest of the world.

GM should design all of its cars worldwide to meet US safety and emission standards (or to whatever are the most stringent) so that importation is easy and cost effective. All designs should be able to be left or right hand manufacturable from the outset and north american models should be able to be sold overseas where possible.

What pisses me off so much about GM is that they have some awesome potential that they seemingly continue to ignore. I've never seen more incompetent management than I have at GM. I know they have the engineers and the designers to woo customers into their showrooms. I also know they are run by the worst managers in the business who are clueless to customers.

i mostly agree with what you just said. But GM doesn't have the luxury to just say "we would like to be a somewhat smaller car company." Their fixed costs are so high that they have to keep that machine going (i.e. the company) to pay for itself. Otherwise, they end up going bankrupt. But yeah, GM does have some awesome potential but continues to shy away from really letting it shine.

[surferdude00711]

I own GM stock. I bought it over Toyoata bcuz I believe they can comeback and be better. Although I know it wil be in at least 3 years from now.

[ibechip]

Wow what happened to Laserwizard? He's making sense! I have to completely agree with him on this one. GM's plan shouldn't be to revitalize their entire lineup all at once but to slowly get away from rebates. To that end, I think that they are doing well. At Chevy, the new Cobalt is coming out with zero rebates (at least that's what I heard last). Hopefully the G6 will do the same althought I've heard rumors of there being 1K back on them.

Where GM really killed itself was by putting rebates on their trucks. They used to be able to get by on the product themselves but that is no longer the case. Why did they just not refreshen the lineup or put more standard equipment on rather than rebates? That just got them furthur entrenched in the rebate war.

I completely agree with Laserwizard, GM's management has been pathetic in the past 20 years. Now we're starting to see some of Lutz's work come through the pipeline and hopefully they will for the most part be smash hits.

[GM-10]

GM's problem is its fixed cost structure. The unions and retirees have to stop being greedy. My understanding is that if GM retirees took a 5% co-pay, way lower than most, GM's bond rating would improve and development cash would flow. Instead these self serving people are going to bleed gm dry.

Congratulations for not taking responsibilty for your finances.

Congratlations for destroying jobs for your children and grandchildrens future.

No wonder Michigan is in such bad shape. Nobody will take responsibilty. Either Washington, GM, or Ford is your daddy. What happened to self sufficiency!

[goblue]

Originally Posted by ibechip

Wow what happened to Laserwizard? He's making sense! I have to completely agree with him on this one. GM's plan shouldn't be to revitalize their entire lineup all at once but to slowly get away from rebates. To that end, I think that they are doing well. At Chevy, the new Cobalt is coming out with zero rebates (at least that's what I heard last). Hopefully the G6 will do the same althought I've heard rumors of there being 1K back on them.

Where GM really killed itself was by putting rebates on their trucks. They used to be able to get by on the product themselves but that is no longer the case. Why did they just not refreshen the lineup or put more standard equipment on rather than rebates? That just got them furthur entrenched in the rebate war.

I completely agree with Laserwizard, GM's management has been pathetic in the past 20 years. Now we're starting to see some of Lutz's work come through the pipeline and hopefully they will for the most part be smash hits.

Laser did make some sense, for once, but I wonder if he can turn that laser eye on Ford. I don't see how they are doing any better. They have the same pension, healthcare costs, don't see any more new models over GM that are going to save it. Heck, Toyota just overtook them as #2. If Laser was a big honda/toyota guy he'd have some credibility on this issue, but Ford? Kinda like the pot calling the kettle black.

[Sparta]

Originally Posted by laserwizard

GM must abandon the pursuit of marketshare at all costs and concentrate on giving the customer great cars with eye-pleasing exterior designs and with interiors that don't look like they ran out of development dollars when they got to the interior. GM must abandon their rebate philosophy and start concentrating on marketing their cars and being concerned about their customers. Each division must have its own identity with its own UNIQUE attribute and no longer should any division share anything with another. No more CSV's or Equinox-to Torments. No more TrailBlazer to Buick to GMC. Cut models, make unique ones, and turn Saturn into the Import Division bringing the world's best GM non-north american cars into their showroom at no haggle pricing using their superb selling apparatus. Their cars will be unique, will be import fighters with imports, and will be able to bring in what is hot from the rest of the world.

GM should design all of its cars worldwide to meet US safety and emission standards (or to whatever are the most stringent) so that importation is easy and cost effective. All designs should be able to be left or right hand manufacturable from the outset and north american models should be able to be sold overseas where possible.

What pisses me off so much about GM is that they have some awesome potential that they seemingly continue to ignore. I've never seen more incompetent management than I have at GM. I know they have the engineers and the designers to woo customers into their showrooms. I also know they are run by the worst managers in the business who are clueless to customers.

Amen!

[dindak]

I generally agree with the article but I'm a value investor so I would buy GM at this point if I thought earnings were on the upswing. That said, it could be dead money for a while.

Toyota investing is risky right now. One or two down quarters could loose you 10-20% quick.

[tgagneguam]

Originally Posted by paul3230

i mostly agree with what you just said. But GM doesn't have the luxury to just say "we would like to be a somewhat smaller car company." Their fixed costs are so high that they have to keep that machine going (i.e. the company) to pay for itself. Otherwise, they end up going bankrupt. But yeah, GM does have some awesome potential but continues to shy away from really letting it shine.

Yes, which is why I am so thankful that Laserwizard doesn't run an organization as complex as GM - presumably. "Make better cars' is such a lame response to GM's woes. Great product is certainly a piece of the pie, but it is so far from being the only thing that needs to be addressed.

At $38+ per share, and even with a P/E of only 5, GM is still a major bet. It's not a bargain at all, particularly in light of its many competitive disadvantages.

[gmsickofan]

I bought some GM stock - looks like it will go back up.