GM’s Financial Future Questioned

Opel factory

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.

Mitt Romney, by ReutersInto 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.)

—jgoods

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3 Comments

  1. Ah, more messages from Randy Feelgood, one of a relative few who takes pleasure in bad-mouthing nearly everything from Detroit. Feeling victimized by GM’s bankruptcy, he vents regularly in these pages, as our readers know.

    Yes, people and organizations get burned in bankruptcy; that is the nature of the proceeding. There are winners and losers in everything, of course, and there is no job security today anywhere. We all know what brought GM down.

    If anyone is interested, there is a full discussion of GM’s bankruptcy at: http://en.wikipedia.org/wiki/General_Motors_Chapter_11_reorganization. The NY Times did a June 2009 “primer” (Q&As) on the bankruptcy: http://www.nytimes.com/2009/06/02/business/02primer.html. Worth reading.

    We learn today that this is the first time since 2004 that all three Detroit companies have made a profit—yes, even Chrysler. See http://www.thecarconnection.com/news/1073042_gm-announces-big-profits-first-time-detroits-been-in-the-black-since-2004.

    “GM says it brought in $150.3 billion over the course of calendar year—an 11% increase over 2010. After bills were paid, GM was left with $7.6 billion in net revenue, up from $4.7 billion last year.”

    That ain’t too shabby. Instead of constantly dumping on Akerson, Marchionne et al., why can’t Feelgood & Co. recognize that their accomplishments (plus other factors, certainly) have finally brought one of America’s most important industries out of the doldrums?

  2. And….Tada, the new JD Powers reliability study is in, and the bottom of the pile is owned exclusively by Chrysler, Jeep, Dodge and Ram. I guess we can credit that accomplishment to Mr. Marchionne, right? ((But Cadillac was in the top 4, congrats to Cadillac.)

  3. Oh, poor government would net a loss? Of course, the same government took the stock in the first place, which was, essentially, equity stolen from the tnes of thousands of stockholders burned when the previous stock became worthless. The big player here is the UAW, which I believe owns a majority share of GM based on their previous dealings and that pension liability. The union needs to flex those muscles to get rid of the brain-dead GM culture (starting with Akerson and Lutz) and find someone who can resurrect this mess. Probably, though, $5/gallon gas this summer will finish the job for both GM and Chrysler. Maybe when Mitt loses in November he’ll want to follow in papa’s footsteps and run a big car company?

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