General Motors (GM)

Rick Wagoner, GM's chief executive, testified before Congress on November 18-19 along with other automaker executives to seek a $10 billion bailout. Washington can grant Detroit automakers aid money immediately from either the Treasury Department’s $700 billion financial rescue program or from an existing loan program aimed at improving the fuel-efficiency of Big Three vehicles. Another option is to pass an independent bill through Congress.

Most lawmakers agree that assistance to lawmakers is important for the country. They just disagree on the means to grant relief. Democratic leaders have pushed a plan to carve $25 billion for the industry out of the $700 billion fund meant to stabilize financial markets. The White House has resisted that plan. Instead, President Bush and top Republicans want legislation that would speed release of a Department of Energy program that provides $25 billion in loans to retool auto plants.

The chief executive of Japanese carmaker Suzuki Motor Corp, Osamu Suzuki, said that a GM Chapter 11 bankruptcy filing would be "100% outside the realm of possibility." Suzuki also said that the two carmakers would continue to work together on the development of future safety and environmental technologies. The partnership between GM and Suzuki goes back 27 years and still involves more than 10 joint projects.

GM's divestment process is going smoothly, and cost cuts are mostly on schedule. With 3 billion already sliced off of its original USD 10 billion annual fixed costs, GM is making headway toward its cost cut goal. It has taken three straight years of declining profit for General Motors Corp. (GM) to realize it is no longer on the cutting edge of the world’s automotive market.

To its credit, GM has shifted its turnaround into high gear, painstakingly reshaping what was once regarded as an American business icon. But even with the changes put in motion, it may be too late to catch rival Toyota Motor Corp. (ADR: TM). General Motors announced yesterday (Tuesday) that it would cut jobs, costs, and possibly sell off its Hummer brand, all in an effort to reduce its exposure to sluggish truck and SUV sales, and respond to a “structural change” in the automotive industry.

That change is, of course, the rising cost of fuel. The price of crude oil accounts for more than 55% of the retail price of gasoline, according to the federal Energy Information Administration, and as the price of oil has more than doubled in the past year, gasoline has followed suit by breaking the $4-a-gallon mark and causing motorists to cringe. Sales of hybrid cars surged 25% during the first four months of 2008 compared with the same period last year. And the trend only grew stronger in May when sales jumped 58%, outpacing a gain of 18% in April, the Los Angeles Times reported.

The stock is incredibly valuable on paper, and looks like it should be worth billions, yet it continues to flounder in the market. There is merit to that argument, yet there is a need to take a cold, hard look at the fundamentals and we think that the stock isn't worthless, and that American Ingenuity wins out over the long haul. There is an incredible valuation gap here between GM - currently selling at 0.05 times sales - and its competitors, both foreign and domestic.

What is the valuation gap? GM's entire market cap right now is just over $9 billion dollars. That's all. There are mutual funds that have probably lost that much on it since it's in the S&P 500 and has been for years. Add on the economic value of GM's debt load and you get a total enterprise value of $30 billion. On a metric of $180 billion in annual sales, that's a price-to-sales ratio (P/S) of 0.05x (on the $9 billion for market cap). Ford, which remains publicly traded, currently has a P/S ratio of 0.08, which isn't much better, although Toyota (TM) (apples and oranges, I know) has a P/S ratio of 0.67.

The naysayers must be saying -"Toyota MAKES MONEY, that's why they get valued so much higher". GM hasn't been exactly printing money lately - they've actually been losing it nearly every quarter for the last few years. The exception has been December 2007, when they posted a surprise profit of $0.08 per share. This Winter should be the "Winter of their discontent." They probably will lose something on the order of $4 to $5 a share, as they continue to downsize and sell off remaining assets in order to be profitable.

So today GM's stock is back at valuations last seen in the depths of 1991. The right axiom is "Buy when blood runs in the streets." Well, folks, look at the chart, look at the fundamentals, look wherever you want. Blood is gushing. Where's the turnaround? We don't know - honest answer - but we still believe that American ingenuity comes to the fore when the chips are down. GM has to - absolutely HAS TO - in order to survive - do something dramatic and they need to do it now.

Revenue per GM share is $318, which is a total of $180 billion annually. If GM could make the industry average profit margin of 5.53% on that amount (skewed, of course, by Toyota's 8% profit margins), well, the company would see some amazingly significant profits. GM shareholders would probably be very happy with a 1% profit margin - which would translate to $3 per share? Too much to ask? Maybe. But those are economies of scale we're talking here.

The GM balance sheet is another enigma. They have over $41 per share in cash on the books, a total of $23 billion right now. Offsetting that is a $44 billion debt load, which gives the company a negative $74 per share book value right now. Ouch. Look past that into the spin-cycle of free cash flow. There's $4.7 billion in operating free cash flow here over the last 12 months, or over $8 per share. The heartbeat underneath this zombie exterior is still working, doctor. Thump, thump. Thump, thump.

GM has the largest market share of any automaker in China, proudly announcing that it was the first automaker to sell 1 million vehicles in China in a single year. As the country's automobile interest expands, GM China will grow with it. In addition to marketing Chevrolet, Cadillac, and Buick vehicles in China, GM also has numerous joint-ventures with local Chinese companies. These partners are a big reason why GM was the first to hit the 1-million-car milestone. GM’s flagship joint venture in China, Shanghai General Motors Co. Ltd., sold 500,308 vehicles in 2007, a 22% increase from 2006, Shanghai Securities News reported. Similarly, for the first half of 2008, while GM's sales shrank in North America, sales in Asia increased a whopping 9.9%.^[1]

GM continues to expand its factories in China and elsewhere throughout Asia, announcing in August 2008 plans to build a $445 million dollar factory in Thailand to build diesel engines used in small trucks sold throughout Asia.^[2]

GM's FlexFuel vehicle program makes it the biggest distributor of ethanol vehicles in North America. Together with its hybrid Saturns and hybrid SUVs/trucks, the FlexFuel cars could help GM turn around its weakening sales and claim a spot as an important fuel-efficiency manufacturer, riding a wave of consumer interest in the area.