There is talk in the financial press that General Motors, which has been giving and getting lots of good news for over a year, is facing some difficult times. Bloomberg:
Through three quarters, Detroit-based GM made more money than in any year since at least 1987, excluding extraordinary gains related to its bankruptcy. It added market share in the U.S. while cutting discounts and took back the title of world’s largest automaker from Toyota Motor Corp.
But some diseased chickens are coming home to roost. One is the mess at Opel, GM’s European division that CEO Akerson decided to keep when he took office (big mistake), and the “biggest contributor to GM’s $14.7 billion in European operating losses since 1999,” says Automotive News.
The other big bleeder is GM’s underfunded pension plans—$22.3 billion in the red at the end of 2010. Morningstar, among others, recommends that the company begin putting excess cash into this gaping hole rather than increasing its dividend.
Finally, GM has far too much production capacity in Europe. This is expected to fall to 69 percent this year and continue to drop. The norm for profitability is about 80 percent. Overcapacity—particularly at Renault, Peugeot and Nissan—is a big problem in Europe, which is experiencing economic setbacks.
At Opel, the situation is complicated by strong unions, which aren’t going to go gentle into that good night, and a pre-bankruptcy loan to GM from the German government. A new labor leader has emerged to work with Akerson to get costs down and increase Chevrolet production at the plant.
Into this turmoil steps Mitt Romney, defender of Detroit’s freedom to die, who instructs the Obama administration to sell its GM stock now. The government, of course, has already planned to sell its holdings, but the problem is timing.
Selling now would give taxpayers a big loss, since GM is priced at around $25.40 a share, and the government needs a $51 share price to break even. So the administration is waiting until GM stock rises, as analysts predict $32 “within a year.”
That’s a gamble, of course, but one worth taking, since it doesn’t matter to GM when the government sells. And selling now would put a further onus on the company at a time when it desperately needs to restructure.
When should the U.S. government sell its GM stock? (Selling today would net the taxpayers a $3.3 billion loss, assuming shares do rise within a year to $32.)