General Motors (NYSE)

...in-depth reviews of stocks from all sectors...

GM (GM, NYSE)

One of the most hackneyed phrases in stock market parlance is "cross roads", where we are once more. Just last week, it looked all so clear, technology was the place to be. Nasdaq had bounced back by a third and the Dow has recouped nearly all of its losses. High P/E, warnings from brokers aside, semiconductor and even telecom equipment stocks surged with abandon. The other sectors; retail, food, metals, oil, were again boring ideas for the go-go millennium crowd. But that is history. The deck has been shuffled and new hands will be distributed over the next few weeks and months, following on cue, what I said in the last piece about this being a trader's market.

One of the more common investment mistakes is to look for a corner to hide. But even when you think you have avoided making a decision, you actually have made one. By doing nothing, you are investing in the idea that the investments you currently have are all the right ones and those you don't are all going to go down. Now that is a pretty tall decision for some one who is trying to avoid making one.

Look to Old Economy for a Change

Well, I am out of my corner and I will make a decision. Spurred by the seemingly good economic growth numbers (2% GDP in the first quarter), I am inclined to say that there will be no recession at least not in 2001 or even 2002. I will even go on to say that just as the wise chairman of the U.S. Federal Reserve thought, our problems were related to too much inventory and as we all know from watching the likes of Nortel Networks and Intel, the main slowdown has been in the tech area. In other words, I will build my investment portfolio with old economy stocks, for instance the car makers.

Based on the noise I hear, Chrysler is having quite a bit of problem with integrating the Daimler brand. Curious how the most expensive car company decided to join forces with the third tier producers of ill-fated models like the K-car. Naturally the investment bankers don't talk to customers or would have known that the idea had holes. Next, Ford with its exploding tires has seeming fixed its image and has nice cars like the Mustang and Licnoln doing well. Unfortunately the stock price is doing even better having moved up dramatically since the early days of this year, trading close to its highs for the year. That leaves us with GM. Phone: (313) 556-5000

GM Makes Cars and More

General Motors (GM) has steered around competitors to remain the world's #1 maker of cars and trucks, including brands such as Buick, Cadillac, Chevrolet, GMC, Pontiac, Saab, Saturn, and Oldsmobile (which is being discontinued). GM also produces cars through its Holden, Opel, and Vauxhall units. Non-automotive operations include Hughes Electronics (DIRECTV, communications), Allison Transmission (heavy-duty automatic transmissions), and GM Locomotive (locomotives, diesel engines). Expanding outside of North America, GM has a 49% stake in Isuzu Motors and 20% stakes in Fuji Heavy Industries (Subaru), Suzuki Motor, and Fiat Auto (Alfa Romeo, Lancia). Subsidiary GMAC provides financing. With over $180 billion in sales, there has to be serious slowdown before your 3.6% dividend is in jeopardy. The biggest mistake you will make however when reviewing GM would be to consider it just an auto manufacturer. Over the last decade its financial arm, GMAC has progressively become an important component of its earnings, contributing more than a billion dollars in profits each year. Aside from the leasing activity, GM is big in a host of other financial services including mortgages. It has other divisions such as Hughes electronics but surely no one wants to hear of technology today. The point is GM is much more diversified today than in any previous slowdowns. Years of downloading auto-parts manufacture and low margin high volatility business segments gives me a lot of confidence that it will come out of the current slowdown with flying colors. The Slowdown is Serious General Motors Corp. (NYSE: GM) reported on 18 April that it earned $225 million, or $0.50 diluted earnings per share, in the first quarter of 2001 excluding special items on revenues of $42.6 billion. GM's first-quarter performance, although better than expected, was down significantly from the record $2.80 per share in the first quarter of 2000 on net income of $1.8 billion and revenues totaling $46.9 billion. The forecast for the next quarter is however higher at $0.95. GM is currently trading at lower than 13 P/E based on trailing earnings and a little higher at around 14 times next years. With its low cost of capital and a 10% to 15% return on equity even in bad times, my ©General valuation Model prices this stock at a P/E of close to 16. That gives you an upside of 20%, not the 100% you are used to in techs but hey, it beats negative returns. The consensus for next couple of years is around $4 per share, about 10% lower than current numbers.

GM was one of the first stocks to come out of the 1987 Crash

The biggest reason GM stock has done little this year is because most investors feel that the dreaded recession is just around the corner. If you take a look at analyst opinions and ratings, you will see that most are recommending a hold on auto stocks, fearing that consumers will retrench from buying cars. Here are the reasons I think that may not happen. First, the fear of a consumer led recession is similar to the fear we had after the 1987 crash. When that recession did not materialize, GM stock was one of the first to recover lost ground, ahead of IBM, Texas Instruments and even Wal-Mart. GM was back to its pre-crash stock price by June of 1988. Second, unemployment level is still far from serious enough to make the consumers retrench from making their two major purchases, houses and cars. Both these are still more affordable today than in previous recessions. In spite of higher cost of these cars, lease rates and flexibility in payments has made cars a monthly payment purchase. As a percent of total income, car lease costs are now lower than ever before. Look at your natural gas bill and you will see my point. The same goes for gasoline prices. Even at $0.80 a litre, the fuel cost is a fraction of the total.

Last Updated May 12, 2001