[Perian]

Link: http://online.barrons.com/public/main

BUY GM - 06/02/08 - Page 27

GM is a risky bet, with its stock sinking and the economy sluggish.

But the company's foreign sales are surging and its labor costs are about to tumble. New models like the Cadillac CTS and the Chevy Malibu are winning raves and the Volt hybrid promises to be revolutionary. Why GM's share price could nearly triple. This week in Barron's.

By Vito Racanelli

IT'S NOT EASY BEING 100. JOINTS HURT, BONES ACHE and the funeral director's eyes brighten when he sees you. Just look at General Motors, which will hit the century mark in September.

Last week, it announced that it's downsizing its labor force by 19,000 workers. Many believe that even that won't be enough to keep the auto giant from the grave. In fact, GM (ticker: GM) now has a stock-market value of less than $10 billion, a mere 1/16th the size of Toyota's.

Its shares, once a classic orphan-and-widow haven, have become favorites of short sellers aiming to profit as each spasm of bad economic news - rising oil prices, higher unemployment, credit downgrades, depressed housing prices - piles on more downward pressure on the stock.

On the long side, General Motors now seems suited mainly for one group - bold investors who hope to eventually double their money but can afford to lose it all if their wager goes awry.

The good news for GM fans: Despite the misery that the car maker is experiencing and might endure for another 12 to 18 months, such a wager ultimately should pay off.

Note: Subscription Required

 

[Perian]

As I picked my issue of Barron's up from my driveway this morning, I was surprised to find the words "BUY GM" staring at me. It's an interesting (cover story) article that if I had to summarize, simply states that in the next few years GM's fixed cost components will be dramatically shrinking. Here is one example: "General Motors says that its spending on pension and health care will drop to one billion dollars annually in 2010 from an average of seven billion over the past 15 years."

If you are considering the purchase of GM stock, this weeks Barron's is $5.00 well spent.

It's also important to remember that Tracinda went with Ford - and not GM. With all of the informational resources at their disposal, it's an important consideration to ponder should you be looking at the purchase of an automobile related stock.

 

[plane]

It's also important to remember that Tracinda went with Ford - and not GM. With all of the informational resources at their disposal, it's an important consideration to ponder should you be looking at the purchase of an automobile related stock.

Not quite.
Tracinda went with Chrysler, then GM and now Ford.
The relevant factor seems to be Kirk's penchant for owning a domestic automobile manufacturer.

 

[Buickman]

On The Cover Of This Week's Barron

WELL WE'RE BIG CAP SLINGERS
WE GOT GOLDEN FINGERS (PARACHUTES)
AND WE'RE HATED EVERYWHERE WE GO

WE SING ABOUT EXCUSES
AND WE SING ABOUT PROMISES
AT TEN MILLION DOLLARS A SHOW

WE DO ALL KINDS OF FLEECIN'
'CAUSE THE BOARD'S NOT POLICIN'
BUT THE FLEECIN' YOU'VE NEVER KNOWN

IS THE FLEECIN' THAT WILL GET YOU
WHEN YOU SEE THE PICTURE
ON THE COVER OF BARRON'S AND MOAN

chorus;
GOING TO SEE GM'S PICTURE ON THE COVER
CAN'T AFFORD A COPY FOR MY MOTHER
GONNA SEE MY FACE A LAUGHIN' AND A STARE'N
AT THE COVER OF THE WEEKLY BARRON

WE'VE GOT A CHAIRMAN WHO'S A SICKY
NAMED RED INK RICKY
WHO'S LEADIN' US ALL DOWN THE WRONG PATH
WE'VE GOT OUR POOR OLD GRAY HAIR RETIREES
DRIVING THE SHAREHOLDER WRATH

NOW LETS ALL DECIDE
TO CHANGE OUR MINDS
BUT OUR MINDS WON'T REALLY BE CHANGED

LIKE THE CHANGE THAT WILL GET'CHA
WHEN YOU SEE "BUY" IN THE PICTURE
ON THE COVER OF BARRON'S AS STRANGE

chorus

WE GOT ALLOT OF LITTLE
SECOND TIER WORKERS
WHO'D DO ANYTHING WE'D SAY

WE GOT A GENUINE INDIAN SUBCONTRACTOR
HE'S TEACHING US A CHEAPER WAY
WE GOT ALL THE UNION LEADERS THAT MONEY CAN BUY
SO WE NEVER HAVE TO OVERPAY

AND WE KEEP GETTING THINNER
'CAUSE RICK, HE'S A SKINNER
WHO STILL ISN'T CARIN'

WHILE HE'S GETTIN' RICHER
WE DID GET OUR PICTURE
ON THE COVER OF THIS WEEK'S BARRON

chorus

 

[silvergoat2k6]

OK, I'm sold...I just placed a "buy order" on Monday for 1 share of GM stock.

(sorry, but with GM's recent history, $17 is about all I am willing to risk at this time)

 

[Perian]

Re: On The Cover Of This Week's Barron

WELL WE'RE BIG CAP SLINGERS
WE GOT GOLDEN FINGERS (PARACHUTES)
AND WE'RE HATED EVERYWHERE WE GO

WHILE HE'S GETTIN' RICHER
WE DID GET OUR PICTURE
ON THE COVER OF THIS WEEK'S BARRON

chorus

General Motors is a better company because of people like you.

Let me know when I can purchase a copy of this at iTunes.

I read this morning that "50 Cent" has a little time on his hands after his house fire...maybe you could work something out.

 

[Buickman]

Re: On The Cover Of This Week's Barron

General Motors is a better company because of people like you.

Let me know when I can purchase a copy of this at iTunes.

I read this morning that "50 Cent" has a little time on his hands after his house fire...maybe you could work something out.

with shareholder equity at minus $41 Billion, the stock isn't even worth 50 Cent.

 

[silvergoat2k6]

Excuse me for not having been an accounting/finance/business major (damn nuclear engineering major)...but what do you mean by "-$41 Billion shareholder equity"?

Do you mean the amount of value the stock has lost over a certain period of time, or what?

 

[Buickman]

Excuse me for not having been an accounting/finance/business major (damn nuclear engineering major)...but what do you mean by "-$41 Billion shareholder equity"?

Do you mean the amount of value the stock has lost over a certain period of time, or what?

from a post at www.thetruthaboutcars.com


Pch101 :
May 29th, 2008 at 9:31 am


"Does anybody know the actual assets versus liabilities? I can’t imagine it’s good nor can I believe the questionable figures from GM’s accountants.

The liabilities already exceed the assets, and it’s likely that the value of the assets are overstated. Of GM’s $146 billion in assets, $43 billion of it is “property,” most of which is the depreciated book value of plant and equipment. It doesn’t seem likely that GM could sell its used factories for anything close to that amount, so in real world terms, they don’t have that much.

Another $17 billion is inventories, which includes that trucks that are sitting around gathering dust. I have my doubts that the $17 billion in inventory will generate $17 billion worth of cash.

They also have $185 billion in liabilities. A large chunk of that is in pensions, so perhaps that is ultimately overstated, in that they could eventually default on at least some of that. But other aspects may be understated. I’d bet that GMAC’s pending problems are not accounted for in the accounting.

Just in case anyone was counting, this means that the net equity of the company is -$41 billion. A big negative number."

 

[ByTheLake]

Given the market cap of GM, maybe Barron's is literally suggesting that we "buy GM".

 

[AMERICA 123]

Re: On The Cover Of This Week's Barron

with shareholder equity at minus $41 Billion, the stock isn't even worth 50 Cent.

Stock ( market ) prices are determined by future expectations concerning equity values and earnings streams - in pertuity.

GM has tremendous potential in that regard.

The question is, will they convert that potential into results.

For those that like to buy high on what 'seems' like a 'sure thing' see TM et al.

For those that remember what you did with Chrysler stocks and bonds in the early mid 80s - hang in there, the best is yet to come - starting around 2010/2012.

Day trading will remain attractive for those that can handle it.

 

[ChevroletRevived]

Definitely an investment stock that I really do believe will pay big in the coming years it'll go way up. The fact is, like this article has pointed out, even if GM's revenue stays the same, when these costs shrink GM would be profitable. Major cost savings are on the way that haven't begun to touch the bottom line.

 

[HotCarNut]

from a post at www.thetruthaboutcars.com


Pch101 :
May 29th, 2008 at 9:31 am


"Does anybody know the actual assets versus liabilities? I can’t imagine it’s good nor can I believe the questionable figures from GM’s accountants.

The liabilities already exceed the assets, and it’s likely that the value of the assets are overstated. Of GM’s $146 billion in assets, $43 billion of it is “property,” most of which is the depreciated book value of plant and equipment. It doesn’t seem likely that GM could sell its used factories for anything close to that amount, so in real world terms, they don’t have that much.

Another $17 billion is inventories, which includes that trucks that are sitting around gathering dust. I have my doubts that the $17 billion in inventory will generate $17 billion worth of cash.

They also have $185 billion in liabilities. A large chunk of that is in pensions, so perhaps that is ultimately overstated, in that they could eventually default on at least some of that. But other aspects may be understated. I’d bet that GMAC’s pending problems are not accounted for in the accounting.

Just in case anyone was counting, this means that the net equity of the company is -$41 billion. A big negative number."

Wow....can you tell you aren't an accountant??? Good thing I am.

First, yes, the depreciated "property" probably isn't worth $17 Billion. However, the depreciated plants that are on the books at basically nothing since they've been around for 40+ years are tied to land that is on the books at what it cost 40+ years ago. The land might be on the books for $1,000,000 and the plant that sits on it has a value of $0 since it is fully depreciated. In real cash terms however, the land might be worth $20,000,000. That's $19,000,000 worth of value that's not on the books since the books have to carry assets at their "historical cost" rather than their fair market value. In other words, the GM assets tied up in Land and Building are actually worth significantly more than their book value (probably something like 3 times their book value or more depending on how long ago the land was purchased and where it was bought).

Secondly, the $17 billion in inventories doesn't refer to finished good alone. It also refers to all of the raw materials and parts that GM has in stock. The value off those parts will only increase as they can be sold to service centers and dealerships as spares for the millions of vehicles GM has on the road. The raw materials at the engine plants are on the books at cost, but given the recent run up in metals prices, are worth significantly more on the open market than GM paid for them in their global purchasing agreements. Finally, the finished goods listed in inventories are on the books at GM's COST, which is significantly less than the invoice that a dealer pays, and a LOT less than the MSRP on the sticker. I think it's safe to say that those inventories are woth AT LEAST the $17 billion, and possibly 20-30% more.

Finally, it would be very difficult for GM's liabilities to be understated. Nearly all liabilities outside of the pension amounts are contractual obligations so that value is set. One of the big liabilities that could turn around is the liability associated with GM's ownership in GMAC. When the credit markets turn again, that liability will disappear and GMAC will become a major profit center again. Plus, GM could sell the remaining portion of GMAC to raise capital thereby extinguishing that liability. They only own 50% and they sold the other 50% at an extreme profit given what we now know about some of the shaky loans that all home lending agencies had entered into in the last 5 years.

In other words, on the books it is negative equity. However, in the real world under fair value accounting, there would be significant upside to GM's asset base while liabilities would remain unchanged. Never forget: Ford had to put all of its assets on the line to secure financing including intellectual property such as the blue oval and the F150 name rights. GM hasn't had to put up anything yet to secure financing. That is a true measure of the relative strength of GM's balance sheet and asset base.

 

[Rick_VT]

As I picked my issue of Barron's up from my driveway this morning, I was surprised to find the words "BUY GM" staring at me. It's an interesting (cover story) article that if I had to summarize, simply states that in the next few years GM's fixed cost components will be dramatically shrinking. Here is one example: "General Motors says that its spending on pension and health care will drop to one billion dollars annually in 2010 from an average of seven billion over the past 15 years."

Thats a massive drop, so does that mean GM will technically be in profit to the tune of around somewhere between 2 billion to 8 billion just from this alone?? or does this money end up somewhere else??

It would be nice if GM can keep up that kind of profit for a while so they can clear the massive debt they have and finally put themselves in a decent spot for the future where they dont need to sell everything, might also mean we dont have to listen to the rants of VCDJ again

 

[dindak]

There is no rush to buy GM stock but sometime this summer might be a good time. It's not for the faint of heart though, there is a considerable amount of risk.

 

[steverino]

Wow....can you tell you aren't an accountant??? Good thing I am.

First, yes, the depreciated "property" probably isn't worth $17 Billion. However, the depreciated plants that are on the books at basically nothing since they've been around for 40+ years are tied to land that is on the books at what it cost 40+ years ago. The land might be on the books for $1,000,000 and the plant that sits on it has a value of $0 since it is fully depreciated. In real cash terms however, the land might be worth $20,000,000. That's $19,000,000 worth of value that's not on the books since the books have to carry assets at their "historical cost" rather than their fair market value. In other words, the GM assets tied up in Land and Building are actually worth significantly more than their book value (probably something like 3 times their book value or more depending on how long ago the land was purchased and where it was bought).

Secondly, the $17 billion in inventories doesn't refer to finished good alone. It also refers to all of the raw materials and parts that GM has in stock. The value off those parts will only increase as they can be sold to service centers and dealerships as spares for the millions of vehicles GM has on the road. The raw materials at the engine plants are on the books at cost, but given the recent run up in metals prices, are worth significantly more on the open market than GM paid for them in their global purchasing agreements. Finally, the finished goods listed in inventories are on the books at GM's COST, which is significantly less than the invoice that a dealer pays, and a LOT less than the MSRP on the sticker. I think it's safe to say that those inventories are woth AT LEAST the $17 billion, and possibly 20-30% more.

Finally, it would be very difficult for GM's liabilities to be understated. Nearly all liabilities outside of the pension amounts are contractual obligations so that value is set. One of the big liabilities that could turn around is the liability associated with GM's ownership in GMAC. When the credit markets turn again, that liability will disappear and GMAC will become a major profit center again. Plus, GM could sell the remaining portion of GMAC to raise capital thereby extinguishing that liability. They only own 50% and they sold the other 50% at an extreme profit given what we now know about some of the shaky loans that all home lending agencies had entered into in the last 5 years.

In other words, on the books it is negative equity. However, in the real world under fair value accounting, there would be significant upside to GM's asset base while liabilities would remain unchanged. Never forget: Ford had to put all of its assets on the line to secure financing including intellectual property such as the blue oval and the F150 name rights. GM hasn't had to put up anything yet to secure financing. That is a true measure of the relative strength of GM's balance sheet and asset base.

Awesome post.

I agree that the land value has increased significantly over the years compared to what GM paid way back when. Unfortunately in most cases GM does not reap the benefit of the true value of the land when they shut down a facility and sell the property. GM incurs millions of dollars in clean up expenses due to stringent environmental laws and GM generally donates the land (or sells it for pennies on the dollar) to the community as a goodwill gesture for basically turning the cities tax bases upside down and putting thousands of taxpaying (state & local taxes) citizens out of work all the while hoping the disenfranchised will buy GM products

 

[Buickman]

Awesome post.

I agree that the land value has increased significantly over the years compared to what GM paid way back when. Unfortunately in most cases GM does not reap the benefit of the true value of the land when they shut down a facility and sell the property. GM incurs millions of dollars in clean up expenses due to stringent environmental laws and GM generally donates the land (or sells it for pennies on the dollar) to the community as a goodwill gesture for basically turning the cities tax bases upside down and putting thousands of taxpaying (state & local taxes) citizens out of work all the while hoping the disenfranchised will buy GM products

or in the case of Flint where they can't even give it away.

 

[steverino]

or in the case of Flint where they can't even give it away.

They should turn Buick City into a golf course

 

[HotCarNut]

Awesome post.

I agree that the land value has increased significantly over the years compared to what GM paid way back when. Unfortunately in most cases GM does not reap the benefit of the true value of the land when they shut down a facility and sell the property. GM incurs millions of dollars in clean up expenses due to stringent environmental laws and GM generally donates the land (or sells it for pennies on the dollar) to the community as a goodwill gesture for basically turning the cities tax bases upside down and putting thousands of taxpaying (state & local taxes) citizens out of work all the while hoping the disenfranchised will buy GM products

GM doesn't have to get "market value" to reap a huge benefit, and the liabilities for the environmental contamination and cleanup are already on the books. That's the beauty of it from a cash perspective: the books are WAY understated on the asset side, but the liability side is current.

As for that land in Flint, I think they ought to deed it to the union at it's "fair value" as part of the assets for the VEBA. Since the union and it's boneheaded leadership over the last 30 years is mainly responsible for the demise of GM, I think it's only fair that they reap what they've sewn.

 

[SigEpCutlass]

Looks like you can read the content from Barron's Online here:

http://www.smartmoney.com/barrons/index.cfm?story=20080602-buy-gm-general-motors