GM: You Still Suck


In the “things to chuckle over this morning” column we have this:

DETROIT—General Motors Co. GM +2.51%said it will purchase 200 million shares of stock held by the U.S. Treasury Department in the first step of the government’s eventual exit from the auto maker within the next 12 to 15 months.

The auto maker will pay $5.5 billion for the shares in a deal that is expected to close by the end of the year. The repurchase price of $27.50 a share represents a 7.9% premium over the closing price on Dec. 18.

“We felt this transaction is attractive to the company, good for business and good for selling more cars,” GM Chief Financial Officer Dan Amman said Wednesday. “It moves us forward and eliminates a significant overhang on the stock that has weighed down the shares.”

Oh really?

The company’s levered free cash flow is negative $2.06 billion according to Yahoo finance.

What’s worse is that the operating margin is only 4.67% with a net margin of 3.79%.  Would you run a company that can only generate 4.67% in gross margin, and call this “stable”?

Not me!

I think the reaction is “amusing” in that the stock is up big pre-market.  The problem with this sort of thing is that (1) the price is above the market, so the company is paying a premium for nothing and (2) it is diluting its cash position to do so.

Now of course you can look at this a different way — the P/E is in the single digits and the P/E/G on expected forward growth is well under 1.  You can certainly argue that the market has applied a huge discount factor to the company’s shares, but I believe that management’s thinking on this — that the government stake was an “anchor” — is a mistake.

The real issue is whether the company’s forward expense requirements from past commitments make sense, whether it is able to build cars profitably and sell them without channel stuffing or carrying back the financing through various hinky dealsand whether its labor costs are sustainable.

If, and that’s a big if, this is all true then GM can succeed.

I don’t buy it with an under 5% operating margin.

Discussion (registration required to post)