The Market Hates GM Shares, and That’s One Good Reason to Like Them
Regardless of what one thinks of auto company bailouts, General Motors (GM) has kept its end of the bargain, even though general economic conditions have not. In a matter of months, the formerly bankrupt company turned its biggest profits in history, rolled out more fuel-efficient cars, and restored a little American pride by selling more vehicles in a year than any other company on the planet. But you’d never know it by the value of its shares, which Wall Street figures just south of a near-bankrupt electronics companies. Value investing, anyone?
Post-bailout General Motors shares have never done particularly well, even after its IPO in November 2010 priced at well-below what many analysts calculated as fair value.
Much of the worry that stock chart above reflects Europe’s now famous economic problems, which slowed down GM sales just after the company’s rebirth. GM already faced European trouble because it had – and still has – lots of expensive plants there that can’t easily be closed or restructured. European consumer confidence figures suggest the company shouldn’t expect sales gains there any time soon.
Good news for GM came from China, where it’s the largest foreign automaker. The company sold more cars made there last year than it did in the U.S. That’s just one of numerous advantages GM now has over Ford (F), which is beginning to make big investments in China. This was the region responsible for GM’s overall sales and underlying earnings gains of more than 10%.
But while China is certainly no Europe, economic growth there is slowing down too. Japanese automakers like Toyota (TM) are expected to pick up some of the market share they lost during last year’s natural disasters. That makes the U.S. market more important for GM, and it isn’t exactly king of the road here at the moment.
The real elephant on GM’s share price these days is its pension and healthcare obligations, which totaled more than $32 billion at the end of 2011. As bad as that sounds, however, GM has almost that much cash on hand already. Hedge fund manager and GM investor David Einhorn has said that’s enough to keep GM from drowning in its old debts.
No one expects great things of GM in the near future. Analysts forecast overall revenues to grow more than 3.5% this year but profits… not so much. Still, GM’s share valuations look astoundingly low -- even for a cyclical company with all those issues. It’s hard to find major companies trading a price-to-sales ratio of 0.25 or a PE ratio of less than 5.5, but GM shares more or less live in that territory.
Perhaps it’s the government’s 26% stake in GM that turns off investors. But Uncle Sam needs about $50 a share to break even on this; reportedly, at least $30 to even consider a sale. At around $25 a share now, it doesn’t seem like an imminent threat to flood the market with shares.
Can GM mess up in ways that would drop its share price valuations even further? Sure. But long-term, is it likely that the fundamentally sound, world’s biggest (or even almost-biggest) automaker really be worth less than this?