GM Finances

[WarrenJ]

From the "S & A Digest:"

"My husband and I were discussing the response you made to my recent e-mail concerning GM. We question whether Porter's calculation of debt service is correct. The latest GM f/s shows $811 million for last 3 months, which would extrapolate to $3.24 bil/annum. Not the $17 billion level Porter referred to. What I suspect is he is using the combined GM Auto and GMAC residential mortgage operations on a consolidated basis. Now that GM has unloaded GMAC, the numbers are very different. Doesn't look so bad to me."

– Paid-up subscriber Patrice Xxxxxxxxxx (EDIT: mine - WarrenJ)

Porter's comment: That's the beauty of America. You can say and believe whatever you like... No matter how delusional...

The facts about GM are available for anyone who wants to look them up. GM sold a controlling stake in GMAC on November 30, 2006, for $7.4 billion, not including possible further distributions. In accordance with accounting standards, GM set aside the finance arm from its financial statements as soon as the deal was consummated. Thus, looking at the quarterly statements, in December 2006, GM's total liabilities fell "only" $191 million from its third-quarter total of $458 million.

Why then has GM's interest expense fallen from $3.3 billion in the fourth quarter of 2006 (post GMAC sale) to only $1.4 billion in the second quarter of 2007? Debts roll over at different schedules and interest payments are made at different times during the year. Here's what we can know for certain about GM's interest obligations. The company has promised to repay long and short-term debt holders a little more than $113 billion. On these hard-dollar loans, the company will have to pay around 7% a year in interest, on a blended average basis, because its credit ratings have fallen into junk levels. That's about $8 billion – which GM has no chance of earning from operations this year.

I don't believe GM will ever be able to repay these obligations because it will have to continue to borrow simply to afford its interest payments. Additionally, the company is on the hook for $75.6 billion in "other liabilities" – essentially health care and pension obligations. These debts have highly variable carrying costs. Even if you assume a rosy scenario (say 4% carrying costs), that would cost GM at least another $3 billion this year. It's much more realistic to assume costs at least twice this amount. These facts should be obvious to any subscriber who looks at the numbers, let alone Wall Street's analysts.

And yet... every time I write about these facts, we get dozens of e-mails saying that it's un-American or anti-union to criticize GM. Or people insist we're just plain wrong. The willful desire of human beings to avoid bad news, and people's habit of blaming the messenger, seem to be in full effect.

--Porter Stansberry, Stansberry & Associates

[Cadillac Jim]

The deal that GM made with the UAW last week transerred the health care and pension funds to the UAW for a fixed amount, essentially replacing the pension liability with a fixed debt that GM can service with other means, including stock issues. Other than that, the liabiltiy numbers may be up to date. As far as "I don't believe GM will ever be able to repay these obligations because it will have to continue to borrow simply to afford its interest payments" is concerned, no I don't believe that this means what Stransbury is saying -- that GM is doomed because its debt payments excced its earnings potential. With the same 1-year analysis, you could say the same for Ford and Chrysler.

I think that this article is misleading to the pont of ... well, words fail me. For one thing, Stansbury didn't address GM's earnings potential in this debt analysis. And we all know that GM has, in a good year, earned over $8.6B in 1997 and that earnings are cyclical and fluctuate greatly, as does market share. Stransbury implicitly assumes that GM will never make this much money again, and in fact seems to be implying that GM will never make money at all again and will become an acquisition target soon, as Harley Davidson and Chrysler did in the 1970's.

Right now we are seeing an industry reaction to increasing oil/gas prices versus the type of product, and domestic American cars were overrepresented by SUVs and trucks. As we have seen by the new model plans by GM that were revealed as part of the UAW agreement, GM has a business horizon of at least 10 years while retaining the ability to react to experience and currently perceived trends through contingency technology developments. Issues such as surprisingly heavy oil/gas usage by India and China driving up the costs of energy worldwide can cause problems like what we are seeing.

Stransbuiry's article looks very much like the kind of investment banker analysis that is based on balance sheets and a knowledge of stock and balance sheet analysis, but no real underlying understanding of the industry or the company, and with a one-year memory and a one-year horizon. This kind of thinking can and must affect stock prices this year, but it isn't a prediction of the future.

On the other hand, having a this-is-the-face-of-it analysis of this year's balance sheet and its effect on stock prices is a good thing insofar as it applies pressure on top management to do what must be done, not what it wants to see done. The dowside is that this is what caused the V12 to be shelved, and some companies develop a 90-day horizon on what must be shown on the balance sheet.

[WarrenJ]

I bought/sold GM at a profit. I don't view it as a "keeper."

If you're looking for a "keeper," think Nucor Corp (NUE).

Regards,

Warren

[JimD]

The big three might or might not survive; the market will decide.

The GM/UAW agreement that gives the UAW future responsibility for retiree health care benefits in exchange for a lump sum ($50B?) will be repeated with Ford and what-used-to-be Chrysler.

With control of capital that could total $100B, the UAW becomes the uncontested de facto largest single payer of health care benefits. They could have the hammer to strike their own favorable arrangement with one or more HMOs. It will be interesting to watch the UAW management over the next 10 years and see if they are up to the fiduciary responsibility.

[WarrenJ]

Both Jims raise interesting points. Nonetheless, GM stock is outside my safety zone for the foreseeable future. I took my profit and banked it. I'm done; outta there.

Regards,

Warren