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Gm profits, but investors are still on the hook
By Shikha Dalmia |
February 16, 2012, Thursday
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THREE years after being rescued by a bailout, General Motors this month announced some rather ambitious profit targets for 2012. But even if it meets these targets - a big if - people should not wait on one foot to recover their remaining "investment" in the company. There is no doubt that GM has returned from the brink. It made US$8 billion last year, a record high, and regained enough global market share to once again become the world's biggest automaker. More impressive, it is planning to bump its profit margins from 6 percent last year to 10 percent this year, on par with its best-in-class rivals such as Hyundai and BMW. This, it hopes, will allow it to post US$10 billion in profits this year, something that only 17 public companies managed to do in 2010.
How did investors react to all this hope and cheer? With a giant yawn: GM's stock price, which has been hovering around US$25 for months, barely budged. That's US$8 below GM's IPO price.
Investor caution
If investors aren't buying GM's rosy scenarios, it's for some good reasons. Peter De Lorenzo, editor of Auto Extremist, notes that GM is facing the most competitive market in history and investors are dubious that it can deliver. GM's US$8 billion in profits last year resulted partly from the tsunami in Japan that disrupted Toyota and Honda's global supply chain.
Both are back this year and more formidable than ever. While GM reported a 6 percent drop in January sales in North America from a year earlier, its foreign competitors posted impressive gains. GM will have a hard time matching last year's performance, let alone upping it if it has even one more month like January, De Lorenzo notes.
Tougher competition in North America is not GM's only worry. Its sales in China are slowing. Also, Europe will probably remain a trouble spot. GM suffered US$2 billion in losses in Europe last year, thanks to Opel, its German brand.
Toyota and Honda don't have the same exposure in Europe and hence have less to worry about. What's more, GM's global pension obligations are underfunded to the tune of US$22 billion, about US$10 billion in the US alone.
If GM manages to address all these issues, notes Sean McAlinden of the Center for Automotive Research, its share price might go up US$40 to US$45. But that's under the best scenario. If stock prices remain at the current US$25 level, the losses could mount up to US$15 billion. That's not counting the US$15 billion in tax write-offs that GM got as part of the bankruptcy deal.
Distort playing field
That's not all the exposure that taxpayers will have going forward. The GM bailout has distorted the playing field so badly that its rivals are demanding their own handouts to even things out.
For example, McAlinden notes, the US government gave GM about US$10 billion more than was strictly necessary to finance its bankruptcy. The money contributed to GM's nice US$33 billion cash cushion right now. GM could use this money to buy its own stock and bid up prices, mitigating taxpayer losses - or pay dividends. But McAlinden doesn't believe that's what GM will do. It could instead use it to pay off its obligations to the union health-care trust fund.
Or it will use the money toward product development, putting its competitors at a disadvantage. Moreover, because all but US$10 billion of the bailout money GM got was in the form of equity, the company has no debt service costs. Ford, by contrast, is still servicing the US$23 billion in debt it took to avoid a bailout.
This is unfair, and the Obama administration knows it, which is perhaps one reason it quickly approved a US$5.6 billion retooling loan for Ford. That, in turn, elicited howls of protest from Chrysler's Sergio Marchionne. The administration gave Marchionne's parent company, Fiat, the majority stake in Chrysler without asking Fiat to contribute a single euro.
Yet Marchionne complains that the administration hasn't been generous enough. In contrast with GM, it forced Chrysler to service the bailout loan. Now it's dragging its feet in approving Chrysler's new retooling loans.
Bailout supporters maintain that it was a one-time deal necessary to shore up firms in acute economic times. In reality, the rush for the bailout's spoils has produced ripple effects that may well haunt the economy for a long time.
As President Barack Obama campaigns to keep his job, he will spin the bailout as a success story that saved millions of American jobs. But people should bear in mind that the hit to their wallets will be substantial and will probably grow in years to come.
Shikha Dalmia is a senior analyst at Reason Foundation and a columnist at The Daily.
How did investors react to all this hope and cheer? With a giant yawn: GM's stock price, which has been hovering around US$25 for months, barely budged. That's US$8 below GM's IPO price.
Investor caution
If investors aren't buying GM's rosy scenarios, it's for some good reasons. Peter De Lorenzo, editor of Auto Extremist, notes that GM is facing the most competitive market in history and investors are dubious that it can deliver. GM's US$8 billion in profits last year resulted partly from the tsunami in Japan that disrupted Toyota and Honda's global supply chain.
Both are back this year and more formidable than ever. While GM reported a 6 percent drop in January sales in North America from a year earlier, its foreign competitors posted impressive gains. GM will have a hard time matching last year's performance, let alone upping it if it has even one more month like January, De Lorenzo notes.
Tougher competition in North America is not GM's only worry. Its sales in China are slowing. Also, Europe will probably remain a trouble spot. GM suffered US$2 billion in losses in Europe last year, thanks to Opel, its German brand.
Toyota and Honda don't have the same exposure in Europe and hence have less to worry about. What's more, GM's global pension obligations are underfunded to the tune of US$22 billion, about US$10 billion in the US alone.
If GM manages to address all these issues, notes Sean McAlinden of the Center for Automotive Research, its share price might go up US$40 to US$45. But that's under the best scenario. If stock prices remain at the current US$25 level, the losses could mount up to US$15 billion. That's not counting the US$15 billion in tax write-offs that GM got as part of the bankruptcy deal.
Distort playing field
That's not all the exposure that taxpayers will have going forward. The GM bailout has distorted the playing field so badly that its rivals are demanding their own handouts to even things out.
For example, McAlinden notes, the US government gave GM about US$10 billion more than was strictly necessary to finance its bankruptcy. The money contributed to GM's nice US$33 billion cash cushion right now. GM could use this money to buy its own stock and bid up prices, mitigating taxpayer losses - or pay dividends. But McAlinden doesn't believe that's what GM will do. It could instead use it to pay off its obligations to the union health-care trust fund.
Or it will use the money toward product development, putting its competitors at a disadvantage. Moreover, because all but US$10 billion of the bailout money GM got was in the form of equity, the company has no debt service costs. Ford, by contrast, is still servicing the US$23 billion in debt it took to avoid a bailout.
This is unfair, and the Obama administration knows it, which is perhaps one reason it quickly approved a US$5.6 billion retooling loan for Ford. That, in turn, elicited howls of protest from Chrysler's Sergio Marchionne. The administration gave Marchionne's parent company, Fiat, the majority stake in Chrysler without asking Fiat to contribute a single euro.
Yet Marchionne complains that the administration hasn't been generous enough. In contrast with GM, it forced Chrysler to service the bailout loan. Now it's dragging its feet in approving Chrysler's new retooling loans.
Bailout supporters maintain that it was a one-time deal necessary to shore up firms in acute economic times. In reality, the rush for the bailout's spoils has produced ripple effects that may well haunt the economy for a long time.
As President Barack Obama campaigns to keep his job, he will spin the bailout as a success story that saved millions of American jobs. But people should bear in mind that the hit to their wallets will be substantial and will probably grow in years to come.
Shikha Dalmia is a senior analyst at Reason Foundation and a columnist at The Daily.
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