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Victoria, TX 77901

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Some perspective on General Motors

Recently, General Motors had its Initial Public Offering to much hype and anticipation. However, what does this mean to the average person?

From my earliest days, I was my father's tool boy on weekend projects. My father is of German and Scandinavian descent and by trade he is an electrical engineer.

As such, my father put the "tight" in "tightwad." We never got anything new; we fixed what we had.

Given this, many weekends were spent busting knuckles on a variety of GM products. This gave me a great appreciation for cars.

Today, GM makes some great vehicles. I wouldn't hesitate to hop behind the wheel of a new Camaro, Corvette, Suburban or pickup. The technology and performance are phenomenal. For this reason, it is great that GM has survived. The fact that thousands of jobs were preserved is also good, although not without controversy.

As a taxpayer, other concerns exist. Our nation sank billions of dollars into GM to keep it afloat. The government promised us we would be paid back every penny. Now that GM has had its Initial Public Offering, where do we stand on our reimbursement?

Based upon the U.S. Treasury and GM's filing with the Securities and Exchange Commission, our government loaned GM just shy of $50 billion from late 2008 through 2009 to restructure the company and finance its emergence from bankruptcy.

Before accounting for the treasury proceeds from the public offering, GM had repaid about $9.74 billion to the government. That left taxpayers owed a little more than $40.1 billion.

The treasury should have recovered more than $13.6 billion by selling 412.3 million common shares, leaving taxpayers owed about $26.5 billion. The treasury would need to sell its remaining 500.1 million shares at an average price of about $53 per share for taxpayers to be repaid.

With GM shares trading in the low to mid-30s, taxpayers are facing an almost $20 per-share deficit on their remaining stake, or about $10 billion.

Making the matter worse, GM has never been worth more than $57 billion - and that was during 2000 when high profit margin trucks and SUVs were selling themselves.

Given this, I am not holding my breath on if, or when, taxpayers will be paid back.

However, does GM offer a good investment opportunity? The only reason anyone owns a company is to share in the profits. Admittedly, GM's financial picture is cloudy at best coming out of bankruptcy. However, analysts at Standard & Poor's estimate GM will earn $2.78 per share this year.

At current prices, this puts the price-to-earnings ratio at about 13.

As I tell my students at Texas Lutheran University, if you choose to invest in this company, you make a conscious decision to bypass all other options. To give you some comparison, you can buy Johnson & Johnson, Microsoft, Exxon or Walmart for the same, or better, valuations than GM.

Further complicating the GM decision is the fact you still have the government as your business partner and a fair amount of debt. You are also in a very capital intensive industry at a time when worldwide demand is significantly curtailed.

Given these issues, the easy decision for my money is to pass on GM's common stock. However, if I get some free time I'd still love to take a new Camaro out for a spin.

Author: Dave Sather

Originally published Wednesday, December 01, 2010

Victoria Advocate