GM Ain't Going Nowhere

By that, I mean going into bankruptcy. Of course, for us shareholders, the stock price has gone somewhere we don't care for -- back under $30.

My reasons for owning the stock remain unchanged. I could always be wrong, but it's my money I'll lose if I am. You've read on this blog several times (at least) why I think GM is undervalued and warrants a position in a long-term portfolio. If you're getting tired of reading that, well, I am as well.

So, for a change, we can read the BreakingViews column (subscription required) in today's Wall Street Journal Europe. Entitled "GM Parts Are Juicier Than The Whole," (sound familiar?) it begins:

"The fate of General Motors is reaching its tipping point. In the first sign of contagion from the bankruptcy filing of auto-parts group Delphi, the car maker has been downgraded again by Standard and Poor's. But this time the ratings agency didn't cut the ratings of GM's profitable finance subsidiaries, GMAC and ResCap. Indeed, it indicated they might be upgraded."

The BreakingViews editors focus on the value of GMAC. (That should sound familiar to regular readers, too.) They speculate it alone is worthy of the attention of investors such as you-know-who:

"Perhaps this is what Kirk Kerkorian has been waiting for. The financier has increased his stake in GM this year to 9.5%. On Tuesday, he was cleared to raise it again to 9.9%. At 10 times 2004 earnings, GMAC might be worth some $30 billion (€25 billion). If that were paid out in dividends, Mr. Kerkorian could make a tidy profit on the $1 billion he has spent buying GM shares. All that would be left to sort out would be how to build and sell cars at a profit. But even if GM failed at that, Mr. Kerkorian might still be in the money."

I agree -- though I would be careful to say "build and sell cars in North America at a profit." GM's International auto business is already profitable, has real growth potential, and is worth roughly $10 billion alone. The company's success in foreign markets such as Latin America, Australia and mainland China is a largely unreported story in the mainstream business media.

But if you and I depended on the MSM for information, we wouldn't be reading blogs like Controlled Greed.

Comments

[javasoy]

John,

I know you believe that GM has quite a bit of value can be unlocked. What do you think of Ford? It too has a strong financial arm, has 100B less in debt, lower Enterprise Value/EBITDA ratio, etc.. just seems to me so much more fundamentally sound than GM. It's approaching its 5-year low, I am not techie, but it's gotta be a support price point there. i think i'll stop before i talk myself into buying Ford. I haven't developed the iron stomach for digesting stocks in ugly situation yet

[John]

Javasoy,

I don't know nearly as much about F as GM -- and I'm sure there are plenty of folks thinking I must not know ANYTHING if I've bought GM! ;-)

I believe that Brandes Investment Partners (a big value firm) is one of F's biggest shareholders (they also own a bunch of GM), so some smart people must find value in the shares.

Bottom line: I don't own it, but if that changes, you'll read it here.

[Alan]

What is it about value investors that make them attracted to structural bankruptcies?

The margin of GM is plus or minus 2 per cent.

The margin of Toyota is 10 per cent.

If Toyota wanted to it could destroy GM in a matter of months by shaving 5% off price. Then GM's margin would be minus 7%.

Toyota does not want to. That is the ONLY reason why GM is not bankrupt right now.

But there is more than one Toyota in this world. Hyundai is setting up plants in North America on Toyota principals with Toyota pay rates. Hyundai will price against Toyota. Toyota will price against Hyundai.

GM will not be a factor in their decisions - just a victim.

I see you also own Fairfax which is a lay down misere zero.

As I say - what is it about value investors.

If you just removed the stuff-ups you would do extraordinarily well.

The thing about Buffett is he removes the stuff ups.

Alan