Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Coverage Initiation: General Motors
After a nearly two-year hiatus, General Motors (GM) has returned to the pages of The Value Line Investment Survey with a new batch of shares. The automotive giant’s history is filled with extreme highs and, as most people are aware, some extreme lows. But the company is off to a fresh start following its historic bankruptcy restructuring and the ensuing November, 2010 initial public offering of its rebranded stock
Heading into bankruptcy, the plan was to split the company in two, with the assets immediately being shed held under the Motors Liquidation name. In reality, this was known as the Old GM, quite a telling way to look at the unsalvageable pieces of the American icon.
The engines were first revved up over a century ago, as Old GM was built on the idea of giving drivers a multitude of options. In fact, the company was formed through the consolidation of 13 smaller, independent manufacturers and 10 auto-parts suppliers.
GM spent the better part of the next century building itself intoTHE global auto maker. In 1931, it surpassed Ford Motor (F) as the sales leader in the largest market, the United States, as well as the rest of the world, a title it did not concede for another 75-plus years.
Throughout the latter part of this period of seeming dominance, however, the seeds of GM’s downfall were beginning to grow. There were a number of factors that eventually led to the historic bankruptcy, from a growing, union-driven cost structure, to operational decisions made in Detroit boardrooms; and there was certainly plenty of blame to go around by 2009.
From a product standpoint, GM’s platform continued to expand, and in the 1980s the company’s multi-branding strategy kicked into high gear. In the years that followed, the car maker, like most of its industry brethren at the time, became infatuated with the fast-growing potential of the sport utility vehicle. And yes, bigger back then was considered better. Behind a stout SUV lineup, GM maintained its sales dominance. However, times were changing. Japanese cars continued to add to their popularity, while gas prices were on a steady upward trajectory. As GM’s overseas competition, like Toyota Motor (TM) and Honda Motor (HMC), adapted to this trend, the U.S. company stuck to its four-wheel-drive guns. Soon enough, market-share declines in the United States were getting wider, and in the first quarter of 2007, Toyota won the crown as the global sales leader, and GM is still in its rearview mirror.
At the same time, the United Auto Workers continued to press for more. Retiree healthcare and pension benefits were piling up. In the years leading up to the bankruptcy filing, GM’s hourly rates were slightly above that of Toyota, but not by an overwhelming amount. However, the company’s healthcare cost per vehicle was over seven times that of its Japanese rival, topping $1,500. Making matters worse, by the time the company filed for Chapter 11 protection, it was on the hook for the healthcare of over one million people, as well as pensions for nearly two-thirds that number. Then came the credit freeze.
Unable to secure lending, and facing a mountain of expenses and waning market share, the company had no choice but to turn to Washington. With looming debt obligations around the corner and the banks’ doors closed, the floundering car maker received $50 billion in bailout funds from the U.S. government. Shortly thereafter, GM filed for bankruptcy, the nation’s third-largest company and largest industrial firm ever to do so.
The iconic American company bottomed out. That said, there was nowhere to go but up.
The restructuring moved at a fervent pace and was completed in less than two months time. Keep in mind, the American taxpayer was not expected to be very patient with $50 billion invested here.
In the process, the New GM began its development. The company started to address some of the aforementioned problems that weighed heavily on its shoulders, especially in the last decade. Through the Chapter 11 reorganization, it trimmed over $120 billion in liabilities off its balance sheet. Significant headcount reductions, to the tune of about 20,000 workers, coupled with manufacturing plant and dealership closures took aim at the once debilitating cost structure. GM was able to unload billions in debt, and the UAW received a 17.5% stake in what would eventually become the new company in exchange for $20 billion owed the healthcare trust.
Meanwhile, GM took a deeper look at its brand identity, which had partly gotten lost in the mix of a sizable platform. As a result, it cut its U.S. brands in half, to the quartet of Buick, Cadillac, Chevrolet, and GMC. The car maker also heightened its focus on the latest vehicle trends, something that had been too slow to develop during the end of the SUV craze.
A clear sign of progress here, sitting on the opposite end of the spectrum as the SUV, is the Chevy Volt. Propelled by Washington’s demand for eco-friendly, fuel-efficient initiatives, the plug-in hybrid got off to a solid start after its debut in December. It also received a higher fuel-economy rating from the Environmental Protection Agency than did the Toyota Prius, though its mileage fell far short of the number GM had previously touted. Still, the demand for electric vehicles is growing, and government-funded incentives are likely to persist.
All in all, these steps helped position the company for a return to profitability. It did just that in 2010, earning over $4 billion through the first three quarters of the year.
Originally, the GM IPO was on track to sell about 365 million common shares, each priced in the range of $26-$29, with another $3 billion being raised in a preferred stock offering. However, as the date of the stock’s return to Wall Street neared, the popularity of this issue continued to swell. And with the U.S. Treasury hoping to maximize its return at the outset, the price and share count increased.
Indeed, the amount of common stock offered was raised over 30%, to 478 million shares, with the per-share value climbing to $33. GM sold an additional $4.6 billion in the preferred stock offering, as well. Further, the underwriters fully exercised their overallotment option on another 71.7 million shares, pushing the total IPO funds raised to $23.1 billion, making it the largest such offering in history.
This was a giant step toward paying back the $50 billion GM had received during the bailout days. The car maker had already paid back slightly less than $10 billion prior to the offering, which significantly reduced the federal government’s stake.
In all, the U.S. Government trimmed its position in the Detroit company from 61% to just about one-third. The UAW healthcare trust fund also pared its stake to 13% and the Canadian government threw another 35 million shares into the pot.
The stock has traded up about 10% since its November 18th debut. It should be noted, though, that there is still quite a ways to go before the car maker would come close to paying the U.S. government back the full amount of bailout funds.
New GM General Motors has received new life. The company is a much leaner operation, and investors hope the company has learned some valuable lessons. One of the most important needs to be a renewed focus on building cars people want to drive.
It remains the largest auto manufacturer in the United States and hopes to someday regain the global title from Toyota. As sizable as its domestic presence is, China is actually GM’s biggest market. The company operates a manufacturing partnership with the Asian nation’s largest domestic producer SAIC, which acquired a small GM stake in the IPO. This relationship should prove vital if the company intends to win back its crown.
In the meantime, the car maker’s first full year as a new company is already under way, and early results were promising. January sales were up sharply from the depressed levels of the prior year. An improved cost structure and product mix should help the car maker sustain momentum. As the industry’s recovery persists, barring any economic hiccups, New GM appears headed for a memorable inaugural year.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.