Forbes' Flint on GM: "Bankruptcy Shmankruptcy"

Last week in a post I linked Bloomberg columnist and money manager John Dorfman's positive view of General Motors (GM/NYSE). Now comes Jerry Flint of Forbes giving his emphatic view of GM:

Enough already on General Motors and Bankruptcy. I am tired of the B-word. GM isn't going bankrupt this year; GM isn't going bankrupt next year; 2008 is so far off that even Bill Gates could be bankrupt by then. It's dangerous to go three years out, but no, I wouldn't expect GM to go bankrupt in 2008, either.

And why not? Here's Flint's answer:

The company has $19 billion in the kitty and just about $100 billion in the pension fund. But there's more here than the balance sheet. When I was a boy, there was one reason companies went bankrupt: They couldn't pay their bills. GM can pay its bills, so that's not a problem.

The new reason for bankruptcy is to break a union contract. That works with airlines because there are always some Navy top guns who owe on their Corvettes and will replace your striking pilots. And there are lots of women left to replace your striking stews.

But replacing 150,000 United Auto Workers members is another story. A judge could tell them to work for 10 cents an hour, but it's still a free country; they can strike, and they would. Plus, they are stronger than the company. The workers own paid-up houses, cars and boats and have working wives (or husbands). GM would have to negotiate any change in the contract, so the bankruptcy ploy just doesn't work here.

People can agree or disagree with Flint. But he's been covering the auto industry since 1958. So he's been around the block a time or two and well worth reading. And read this piece you should. And, lest you think he's being a cheerleader for the company, Flint suggests things could get interesting for Rick Wagoner later this year:

If a turnaround at GM isn't evident by fall, look for a management change. But enough of the bankruptcy talk.

Hey, I'm upfront about the fact I'm underwater with GM. The stock was recommend on this site last April 29 at $29.75 a share. It closed yesterday at $24.34. (I'm personally doing even worse. I first purchased GM at $37 before this blog was launched. My average cost is in the low $30s).

That all said, I've maintained the GM holding in the portfolio. I didn't add to the position when the stock was trading in the teens because it's a already a large holding. If that changes, you'll read about it here.

In the meantime I remain cautiously optimistic. I may be a fool, but time will tell.

Comments

[greg dumas]

i agree bankruptcy unlikely.. the only question i have is how does stock react after the dividend cut.. it may tread up to 30's and then fall back to 20's when dividend cut. or it may stay around here and fall back to teens when it cut.. or it may not do anything bc it may already be priced in.. that the only issue i want off table before i buy.. i ow GJM and some of GMAC bonds.. maybe one should explore long term leaps as a cheap way to play this bc stock is cheap and their business overseas by all measure good.. one last negative i see is for car business as a whole.. i think many americans over past few years have already bought new cars..i dont see alot of demand for new cars in US in near term-- next couple years--bc of that..

[nodoodahs]

I've been thinking bankruptcy was in the cards for GM for almost a year, now. Been posting pretty much about their odds of bankruptcy for a long time, too. A statutory change to the accounting for unfunded pension obligations could reduce their equity to zero with the stroke of a pen. There's a good reason why Ben Graham sought out companies with little debt.

Had a "conversation" about GM on Nov 21 2005 after Henry of MarketThoughts posted this:
"Outside Audit
General Motors, Ford Offset Losses
By Dipping Into Cookie-Jar Funds
By JEFFREY MCCRACKEN
Staff Reporter of THE WALL STREET JOURNAL
November 22, 2005 "

My response was:
"The “we know what we’re doing” attitude inherent in that quote reinforces my opinion: I don't think current management is capable, psychologically, of doing what needs to be done. If Kerk has a plan, IF, I still doubt he has enough influence and time to get it implemented in the face of management. Bailout, bankruptcy, or perhaps acquisition and splitting off the pieces a la "Pretty Woman" or "Other People's Money." I’ve said it before, they might be able to survive as an automaker with maybe 1/2 the production, but they don't have the cojones to do that, and no one in management was alive the last time GM was #2 in U.S. market share, so they can't envision going there voluntarily. I think, when they are AGAIN #2 in U.S. market share, no one in management will be alive, either. Hah! I slay myself! LOL!

GM’s current plan, to reduce capacity by 30% over 2-3 years, is more than I expected from them but less than what is needed IMO. It boils down to a 10-15% reduction in production to increase capacity utilization. I don’t think they can make it to the end of this union contract.

It was noted that the CEO of Delphi was the same guy in charge of Bethlehem Steel when it went bankrupt. Is that true? God help me from investing in the next company he runs! What are the odds?

I was looking at their balance sheet, and noticed that from the QE 9/4 to QE 9/5, "total equity" went down from 27.781 billion to 22.424 billion. If you exclude intangible assets from consideration, equity went from 23.049 billion to 17.625 billion. Note the increase in "other non-current liabilities." So they have destroyed, in one short year, between 19.3% and 23.5% of their equity. Meanwhile, inventories as a percent of revenue have climbed from 0.268 to 0.300 and in absolute terms, their inventories are increasing. YTD, their interest payments have exceeded their operating cash flow. If the short interest (and their dividend yield, but not for long!) weren’t already so high, I would be adding few shares to it ... neither you nor I could survive with the financials GM has. While they LOOK flush with cash, it's only because they are destroying equity rather than burning cash in hand, through taking on increasing amounts of "non-current liabilities" rather than spending the actual cash.

Henry, do you think the increasing “non-current liabilities” is indicative of weakening loan-loss provisions in order to keep cash on hand and offset losses?

Note that they are "bolstering their earnings" while destroying equity - more evidence of the need to check earnings quality when evaluating companies."

I know how it feels to hold a loser. But at some point, I had to re-evaluate my rationale for buying in the first place and my rationale for holding. GM is bound for bankruptcy, barring a gov't bailout. You may get good ops to sell and mitigate your losses when GMAC is sold, or when SAAB is sold, or when Hummer is sold, but I think your best bet is to sell.

[John]

Gentlemen, thanks to you both for excellent comments. I'm still holding, for now at least. I bought GM in 2005. This year will be tough, I'm sure. Let's see how things are in 2007, 2008. And yes, I think the company will still be around and will not have filed bankruptcy. I could be wrong but, as they say, that's what makes a market.