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Why GM can cruise again
The company is banged up, for sure, but it's not totaled.
July 21, 2005: 2:58 PM EDT
By Stephen Gandel, MONEY Magazine
How GM's parts perform
The U.S. auto business is shaping up as a clunker for 2005, but GMAC and overseas operations are humming.
Overseas earnings$153 million
GMAC earnings$2.6 billion
U.S. auto earnings-$2.4 billion
Source:CSFB.

NEW YORK (MONEY Magazine) - Remember when a Buick impressed the neighbors? Probably not. General Motors and its venerable brands have been slipping for decades.

So when the automaker announced a $1.1 billion first-quarter loss, analysts downgraded its bonds and even started talking bankruptcy. But GM (Research) has $53 billion in cash and a financing unit that prints money.

What the bulls say

Evaluating GM's stock based on its U.S. car business is like buying a Corvette without looking under the hood. GM's profit engine is its finance division.

General Motors Acceptance Corp., which underwrites mortgages and sells insurance as well as car loans, should earn $2.6 billion in 2005. Northern Trust portfolio manager Robin Kollannur, who has been buying GM shares, estimates that GMAC alone is worth $60 a share; GM stock trades for $34.

"You don't need a turnaround in North American operations to see GM's shares rise," says Kollannur.

Not to say CEO Richard Wagoner isn't trying. He is cutting the payroll by 25,000 and jawboning the union to lower health-care costs, which totaled $5.6 billion last year.

Redesigned models and launches such as the Miata-like Pontiac Solstice could put new polish on GM's brands. It happened with Cadillac, where sales are up nearly 40 percent in the past four years. And Buick, of all things, is hot in China.

Casino mogul Kirk Kerkorian, who shook up Chrysler in the 1980s, has also given GM -- if not its management -- a vote of confidence, recently buying 7.2 percent of the company.

What the bears say

GM spends $1,525 per car in health-care costs, about four times what Toyota pays on cars built in the U.S. That drag isn't going away. While downsizing cuts GM's payroll, the bill for retiree health care and pensions rises.

Analyst Michael Ward of Soleil Securities estimates that these costs will hit $10 billion in the next few years, up from $7.6 billion in 2005. Despite Wagoner's pleading, GM's union probably won't agree to a benefit cut until the next contract in 2007. Warren Buffett is among those who think that GM's legacy costs make the stock unattractive.

High costs leave GM with less to spend on innovation. And it shows.

"From the exterior, GM's newest cars are not that different from what they had before," says Wes Brown of Iceology, a consumer research firm that specializes in autos.

GM's strength is in large SUVs, where it has a 63 percent market share. But with gas prices up, sales are down. If GM can't start selling more cars, its fixed costs and restructuring plans will devour more and more cash.

Deutsche Bank analyst Rod Lache believes that GM will burn through $5 billion in 2005.

Bottom line

GM is far from a wreck. Wagoner has said he is confident that the company can maintain its dividend, which now makes for a hefty 5.9 percent yield. Longleaf Partners Funds, one of GM's largest outside shareholders, estimates that GMAC earns $5 a share a year and that foreign car operations will add another $2 within a couple of years.

So if GM can push its U.S. operations merely to break even, at its recent $34 price the stock would carry a ridiculously low price-to-earnings ratio of just under 5.

"The current price of GM not only reflects stormy times for a while but extrapolates them forever," Staley Cates, a portfolio manager at Longleaf, recently told his fund's investors.

As the guy in the showroom says, this kind of deal can't last.


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