GM Needs to Work Through Its Demons

 | Dec 14, 2011 | 10:30 AM EST
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Late Tuesday, I participated in an interesting discussion about General Motors (GM) among a few Real Money contributors, with the traders wondering what we value players thought of the stock. Shares are down 45% year to date and, so far, the much-heralded "initial public offering" just over a year ago hasn't turned out the way many believed it would. While I tend to stick to much smaller names, this is a much bigger fish on which I've had some strong opinions over the years.

In fact, in one of my earliest Real Money columns, back in 2008, I opined that bankruptcy was probably in the company's future. Given my grandfather's long career at a GM plant, these were tough words to write. We were a GM family. We owned nothing but Chevy vehicles until the late 1970s and early 1980s, when the quality became so horrendous that we went another route. To the company's credit, GM turned that issue around and starting building much better vehicles. But so did everyone else.

On the surface, what's not to love about the fundamentals of this company? The stock is trading at just above 4x trailing earnings, and just 5x 2012 consensus estimates. GM ended the third quarter with nearly $32 billion, or $20.44 per share, in cash and short-term investments. It carries just $11.1 billion in debt, and the bulk of that -- $9.6 billion -- is long-term. Indeed, the balance sheet is much better than that of the predecessor company.

Still, several issues continue to weigh on GM. Some are long-reaching, while others may be temporary. First, I believe that there is still a "Government Motors" stigma attached to the company. This has probably driven away some car buyers -- and investors, as well. The way the bankruptcy deal was handled, and the manner in which bond holders were treated, was a very bitter pill for many to swallow. This sentiment might fade over time but, for some, it remains a prominent issue.

Further, there are still some major post-retirement liabilities with which to contend, to the tune of about $27.5 billion as of the latest quarter. The assumed return on plan assets as of year-end 2010 -- 8.5% for the U.S. pension plan, for instance -- seems out of whack. That's especially so considering the target asset allocation of the portfolio, which pans out at 29% equity, 41% debt, 8% real estate, and 22% "other." One would hope the company will be putting forth some more realistic assumptions for 2012 and beyond.

Finally, while GM has reduced its number of brands and models, which is positive, there's another lingering issue. What does this company have to offer that the average consumer can't get somewhere else, and with a potentially higher resale value? What's the draw? Its electric car, the Chevy Volt, has been an utter disaster so far, and has not saved the company. In fact, from a public relations perspective, it has probably done more harm than good. Recent reports of the vehicles catching fire certainly haven't helped matters. Through November, the company had moved 6,142 Volts for 2011, and was not on track toward meeting its 10,000-unit goal. The car is simply too expensive to be a viable product.

To GM's credit, it has been putting up some decent earnings numbers and exceeding consensus estimates. However, that has not been enough to eradicate the pall that's been cast over this company. Overall, it still looks like a value trap to me. GM must get the pension issue under control and shed the "Government Motors" moniker. It must build the killer, must-have products that will entice buyers away from Honda (HMC) and Toyota (TM), that will hold their resale value and prove the company's long-term viability. If it managed to achieve all this, GM would fetch a higher multiple. For now, the skepticism remains.

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