GM Volt Subsidy Study Causes a Jolt, But Let’s Look at the Underlying Business

Economist James Hohman’s claim that every Chevy Volt General Motors (GM) sold cost taxpayers up to $250,000 inspired a rash of righteous indignation from both anti-subsidy conservatives and skeptical electric car backers. Investors, however, may prefer a colder view on this one. Solyndra aside, government-subsidized shares often make lucrative long-term investments. And GM looks almost ready to become one of them.

The tizzy over GM subsidies re-ignited last week when Hohman, an assistant director of the Mackinac Center for Public Policy, calculated the total in a clever new way. He added up 18 government-backed loans, rebates, tax credits and various perks granted to companies that contributed to Volt development and sales. Then he divided by 6,000, which was roughly the number of Volts sold at the time of the study, and voila: a newly outrageous number.

Over on Wall Street, other distractions caused would-be GM investors to miss the fact that business generally is really quite good for GM now. Recent earnings have surpassed analysts’ expectations. Consumers are returning to SUVs and trucks, which happen to be GM’s forte. Earlier this month, GM surpassed Toyota, at least briefly, in worldwide vehicle sales. Its Chevrolet Cruze is among the 10 most popular cars on the planet.

Hedge fund manager David Einhorn, best known for tech investing and busting a few high-priced growth stocks -- of late, Green Mountain Coffee Roasters (GMCR) -- has been a big buyer of GM. And U.S. car sales generally have been trending up.

US Auto and Other Motor Vehicle Sales Chart by YCharts

Yet there’s little evidence of any good news in GM’s share price.

General Motors Company Stock Chart by YCharts

Much of that decline reflects real problems on the ground. Two Chevy Volts caught fire in crash tests last month, prompting GM to offer to buy back the models from worried owners. Few have taken it up on the offer, but the stigma remains. Also, GM, like other car manufacturers, is losing money in Europe. It’s hard to predict when consumers there will be willing to pay up for a car again.

It’s doubtful that subsidies have much to do with current investor consternation. Most investors would be hard-pressed to find a lot of shares in their portfolios that don’t benefit from a corporate tax break, a city land grant or some other form of government handout. Some of the more overt suckers of subsidies – the big ag and oil companies – are among Wall Street’s best long-term investments. This despite the fact that subsidy tends to wax and wane in different years, sometimes shooting down share prices when they expire.

Archer Daniels Midland Stock Chart by YCharts

Solar panel company Solyndra was, of course, a subsidy-fueled bust all investors would like to avoid repeating. But this is generally why value investors tend to buy big-company shares like $30.42 billion market cap GM, for which the heavily-subsidized Volt is a tiny fraction of sales, and not A123 Systems (AONE), the small-cap that got government money as a potential Volt battery supplier. Getting a subsidy doesn’t change age-old risk differentials between start-ups and institutions.

Hohman’s study infuriated backers of government-supported electric cars because it made that dollar figure astronomical in a couple of ways: by relying on the low number of Volts yet sold and using the top possible dollar figure all those companies could collect for the project. (Which he admits they are unlikely to reach.)

But Hohman’s real sin was simply calling a subsidy a subsidy, something both fans and enemies of government help generally avoid. Because once you go down that road, the list of subsidized companies gets embarrassingly long and rather dear. Very few want to cut off everyone; just remember what did (not) happen recently when big oil subsidies came up for debate. And if GM can do what every shareholder, including the government, expects – produce a good product, at a good profit, for a good investor return – that sticker shock over its subsidies will quietly fade.