A Leap of Faith: General Motors
This article is part of our Leap of Faith series, in which Foolish writers each pick a stock to take a chance on for the long term.
"You think I should buy General Motors (NYS: GM) ? Seriously?"
As the Fool whose turf includes the automakers, I have this kind of conversation with people all the time. It's easy for folks to understand why Ford (NYS: F) might be a buy: Lots of great new products, a rock-star (in a genial, low-key sort of way) CEO, and a daring self-financed turnaround that captured the world's imagination have made Ford's remarkable comeback hard to miss.
Ford has won lots of new fans recently, and it'll win more as more people check out its much-improved cars and trucks. Profits have been strong and could get better in coming years. It's an easy story to tell because it's such a good one.
But GM? That's a bit more of a challenge. But it's worth telling because believe it or not, it's also a pretty good one -- if you're willing to make a few leaps of faith.
Stay with me here
Even though the companies are in somewhat similar situations, the idea of investing in GM requires a "leap of faith" (or two, or three) that buying Ford doesn't. There are a few reasons for that:
Leap 1: The bailout
It's the 800-pound gorilla in GM's living room. GM was run into the ground by decades of managerial ineptitude, and then abruptly restructured in a prepackaged bankruptcy-bailout that cost taxpayers billions and left lots of hard feelings in its wake. While those hard feelings don't appear to have had a big effect on GM's sales, they have made it hard for the General to tell its story. And the company, like its technological flagship Chevy Volt, has become a political football in an election year.
Here's why this is worth a leap: First, the folks running GM now are not the folks who ran it into the ground. CEO Dan Akerson joined GM's board in the wake of the bailouts after a long career in private equity. His senior team is a mix of top-notch outsiders and the best of GM's managers from the old days. Together, they've done an impressive job of getting the General's finances whipped into shape and putting its product-development efforts into high gear.
Second, at least technically, the bailout has already been "paid back." As agreed -- in fact, years ahead of schedule -- GM gave the U.S. Treasury an equity stake and $6.7 billion in cash. Of course, the government still owns a big chunk of GM stock, and its current price is well below the price the Feds will need to break even on their "investment." But GM's management is looking forward, not back, and those who take the leap to look with them might see an interesting investment opportunity.
Leap 2: Parts of GM are still losing big money
GM's North American operation is posting record profits, despite an industry sales rate that is still far below pre-2008 norms. Its Asian division is making good money thanks to GM's market-leading position in China. Its Latin American branch needs new products and some restructuring, but it's not in awful shape and fixes are already well under way.
But GM Europe, particularly its German subsidiary Opel, is a very big mess. Opel has lost more than $15 billion since 1999, and it's still losing money despite a major restructuring effort in the last couple of years. Much like GM's problems in the U.S. in the years before bankruptcy, Opel's problems aren't simple, and they won't be fixed by closing a couple of factories. But bankruptcy isn't in the cards, either. What's needed is a comprehensive fix that all stakeholders -- unions, GM managers, and local governments, particularly the German government -- can accept.
Sounds simple, right? It's not. But here's the leap of faith: Akerson is determined to make it happen and happen soon. Several of his deputies were put on Opel's board late last year, and Vice Chairman Steve Girsky -- Akerson's right-hand man -- has been charged with creating a turnaround plan that will keep GM Europe profitable during good times and bad. It might be expensive, and it might take awhile before it gets the results Akerson wants, but I think it'll happen and I think it'll be a success.
Leap 3: Not all of Old GM's debts were discharged
Thanks to that bailout and restructuring, GM has minimal debt and more than $30 billion in cash. Thanks to rigorous new financial controls, CFO Dan Ammann has better command of the General's finances than any GM CFO in decades. Thanks to a couple of landmark deals with the United Auto Workers, GM's long-standing health-care liability is largely off the books. A lot of good work has been done.
GM's pension liability, however, might still be the largest of any company in the world. The shortfall in the General's global pension funds stood at an eye-popping $24.5 billion at year's end. Now that's not a crisis, at least not yet -- GM won't be required to make up any of that shortfall for a couple of years yet. And it's possible that the investments in GM's pension portfolio might make up some of that lost ground in the interim, though with Ammann's recent disclosure that GM was moving its pension investments to a lower-risk asset allocation, there's not too much room for optimism there.
So that's a problem, right? Here's the leap of faith: Ammann and Akerson have already taken big steps to "de-risk" (their term) GM's finances, and the pension problem is solidly on Ammann's radar. While GM hasn't said exactly how they're going to deal with the shortfall, my sense is that they have a plan -- and if all else fails, the company has more than enough cash to make it up.
Why these leaps are worth making: GM's cheap, and improving
GM's product portfolio is good and getting better. It's implementing a consolidated product strategy much like Ford's, one that will reduce the number of models it offers around the world while making each of them better and cheaper to produce. GM's best products already compete well with the likes of Toyota (NYS: TM) and Volkswagen (OTC: VLKAY), and GM's new generation of cars and trucks rolls out over the next couple of years, its competitive standing around the world should continue to improve.
Despite its remaining challenges, GM has reclaimed its old title as the world's largest-selling automaker. It just reported a record annual profit, and management continues to impress with its vision and execution. But for all that, GM stock is cheap, selling at less than six times earnings. GM's market cap is less than $42 billion -- this for a company with $31.6 billion in cash on hand at year's end, a company that is a major presence all over the world, that owns some of the industry's (some of America's) most storied brands. Is that worth a leap?
I took the leap. I bought GM not long after it went public in 2009, and I bought more last year. What do you think?
See what other stocks are getting our Foolish writers to swing for the fences; click back to the series intro for links to the entire series.
At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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