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Realism
Saturday, January 13, 2007
The euphoria of the North American International Auto Show is unfounded, remindful of the glee under GMS. Glitz and glamour do not add up to market share improvement. Red Ink Rick just spun 51% of GMAC for $14 Billion and the shareholders received NOTHING! Now his friends at Cerberus are in the hunt for the Delphi carcass. Beware the bankers and lawyers with their ravenous appetite. The shell of GM remaining will continue in decline as this year progresses. Believing anything has changed under Wagoner is a gross misperception.
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From Stansberry & Assoc.
Over the last 10 years, GM's gross profits have
declined 46% a number that does not factor in legacy
costs. GM's cars have become increasingly
uncompetitive because GM has not kept pace with its
peers in several key areas, most notably styling,
performance, handling, and interiors. To sell these
cars, GM has been forced to rely on deep discounting,
frequently selling cars for less than their total
production costs.
That's why its gross profits have fallen in half.
A business of this size, with a slim return on assets
even in good years, cannot afford such a material
decline in gross profits. You should notice that GM's
corporate overhead (SG&A) has grown by 89% during this
period. Its corporate overhead alone now exceeds its
gross profits.
That's why GM has seen its total debt more than double
in the last 10 years. Worse, its interest expenses
have skyrocketed because not only have total debts
grown by more than $200 billion, its credit rating has
fallen below investment grade.
GM is already bankrupt& shareholders just haven't
realized it yet.
In 2007, GM's corporate overhead and its interest
expense will likely exceed gross profits again. In
addition to these losses, the company faces its legacy
obligations, restructuring expenses, and capital
investments, which are constantly needed to keep its
plants operational. Quite simply, GM cannot possibly
afford its overhead, its upkeep, and its interest
expense. This company is upside-down. Its asset base
cannot support its overhead never mind any legacy
costs.
On top of this unpleasant financial reality, there are
a host of other problems, each of which could destroy
the company. GM's collective bargaining agreement with
the UAW will expire in September 2007. Any UAW strikes
would bankrupt GM in a matter of days. A federal grand
jury is investigating the company's accounting with
suppliers. Separately, SEC and federal grand jury
subpoenas have been served on GMAC insurance entities.
Any federal indictment would trigger defaults on all
of the company's senior debt, forcing bankruptcy.
When it's all over, you can be sure that Congress will
demand an investigation. That CNBC will say that no
one saw it coming. And that GM's leaders will be
hauled into the courts, charged with all types of
fraud and "looting the company."
The truth is more banal. GM has done a terrible job of
designing, building, and selling cars for a long,
long time.
There is, however, a silver lining. Inside GM's
enormous pile of assets, there are more than a few
gems. Investors who position themselves correctly now
will be able to grab those assets for pennies on the
dollar, after they become unencumbered by GM's legacy
costs, debts, and inept managers. For these investors,
GM's impending bankruptcy looks more like a rainbow
leading to a pot of gold than just a thunderstorm.
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