General Motors’ stock hit an all-time low today of $31 and change. That’s right, “all-time.” Today’s GM is a new company that did not exist two years ago. In an effort to shed liabilities and force sacrifices from creditors while protecting the UAW, GM emerged from bankruptcy as a totally new company. The media inaccurately reported that GM had its best earnings since 1999, but it has not given a clear picture of the situation at GM. Biased media coverage is a story in itself, but let’s look at why GM has not done as well as the pundits predicted, and why it is likely to continue to struggle.
Much of the good news is behind GM
Investment banks with a vested interest in seeing GM succeed have already initiated coverage with buy ratings and rosy projections. When GM shares started to trade below the IPO price of $33, underwriters were free to purchase shares during the lock-up period to support the price. This support did not hold. The media, as well, hyped the IPO and practically proclaimed the Chevy Volt as being a savior for GM. Neither the stock performance nor the Volt is living up to expectations. The risks now are greater than ever.
The auto sector competition is fierce
Under normal industry free-market conditions, when a sector struggles weak companies are shaken out through consolidation. The “unique” approach pursued by the Obama Administration’s auto bailouts not only protected GM and Chrysler, it gave a stake in Chrysler to Italian automaker, Fiat. The competition has intensified with newer players like Hyundai and Kia grabbing market share. This environment squeezes margins as GM raises incentive spending to try and maintain market share.
Heavy dilution coming
Shares of GM have already been diluted by the issuance of $2 billion of common shares to pay UAW benefits. GM has recently raised the number of authorized shares from 2.5 billion to 5 billion and I expect future issuance of shares so that GM can meet its UAW pension obligations. In addition, Old GM (Motors Liquidation Company) will soon distribute warrants for New GM which equal approximately 15% of outstanding shares. This will be dilutive to existing shares and will weigh on share price. The bondholders who will finally receive their equity are very likely to flood the market with sell orders. Even more selling will come from other sources like investment banks, US and Canadian governments and the UAW when the IPO lock-up period expires on May 13th. These risks are noted on GM’s latest 10K report where they state, “The sale or availability for sale of substantial amounts of our common stock could cause our common stock price to decline or impair our ability to raise capital.”
Weak European operations
GM’s European division, Opel, continues to struggle and weigh on profitability. It may take a while, if at all, for Opel to become profitable.
UAW and Commodities costs
Costs continue to weigh on GM from its UAW overhang. This will be an ongoing strain as the UAW expects to benefit from any potential profits at GM. Rising commodities costs are also a concern. Perhaps most damaging is the effect of rising gas prices on consumers. More profitable truck and SUV sales are most likely to take the brunt of the damage.
Questionable management team
GM is on its fourth CEO, Dan Akerson, in less than two years. Since Akerson has been at the helm, the stated focus of GM has gone from marketing (including adding humor) to the Chevy Volt to China sales. The Chevy Volt has had dismal sales and is being exposed as a vehicle that, according to Consumer Reports, “just doesn’t make a lot of sense.” China market share and profitability actually fell during the fourth quarter. It also appears that the rate of growth is slowing in China. The Chinese market is far less profitable than North America, yet Akerson calls it GM’s “crown jewel.” Other comments from GM executives that lead me to believe that GM doesn’t get it came from VP of US sales, Don Johnson. When discussing incentives during February that were about $1000 per vehicle higher than Ford and the industry average, Johnson claimed that additional money spent on incentives didn’t have that much of an effect on sales. Why would you spend more money on incentives if they do not greatly improve sales? An additional $1000 per vehicle on monthly sales of about 200,000 equals $200 million of added spending. GM seems to have taken a very cavalier attitude towards freely spending taxpayer money.
Reliance on Chevy Volt and weak product launch
GM (as well as taxpayers) has invested much in the Chevy Volt. Credibility and profitability are being strained by the low sales and questionable value of the Volt. Executive Chairman of Ford (a company with proven management), William Ford, recently stated that the pace at which electric vehicle success develops is unknown and “anyone who can tell you that is lying.” He adds that developing a stand-alone electric vehicle is dangerous and could lead to having to “incentivise the heck” out of unpopular vehicles to sell them. Regarding these incentives, Ford states that “it’s a spiral we don’t want to get in anymore.” There is also a lull at GM in the rolling out of new product. The Malibu and Impala are dated and the competition is better than ever.
Lack of established captive finance
GM is one of the only major automakers that rely on an outside source (Ally Financial) to finance the majority of its retail sales and dealership floorplans. It remains to be seen how this end of the business plays out. Captive finance is crucial to the success of an automaker.
The risks mentioned above hardly seem to get the attention warranted by the media and analysts. Mom and Pop investors who were persuaded to buy GM shares by the biased coverage are the ones most likely to get hurt. At some point accountability should be taken by those who are helping to hype what may become history’s largest pump and dump scheme.