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A Fruitless $80 Billion Investment for Taxpayers

A recently released report by the Government Accountability Office (GAO) is not a reassuring sight for taxpayers who are looking for reparations for their $80 billion investment in the auto industry. One major problem highlighted in the report is that the Treasury has conflicting interests due to its significant stake in the automakers. To make matters worse, the GAO raised concerns that the Treasury does not have the necessary expertise to navigate these complicated trade-offs:

“Because of the particular needs of the auto companies and the unprecedented nature of providing such assistance, Treasury hired or contracted with a number of individuals with expertise in the auto industry, equity investment, and relevant areas of law...Since those agreements have been finalized and the workload has declined, two-thirds of the original professional staff has left...given the wind-down of the auto team—and the associated loss of dedicated staff with industry- and company-specific knowledge and expertise—we are concerned that the Treasury may not have sufficient expertise to actively oversee and protect the government's ownership interests, including determining when and how to divest these interests.”

As the report points out, the Treasury has a few options for divesting the government's interests in the automakers, including public sales and private negotiated sales. But no matter what the Treasury decides to do, the GAO predicts that taxpayers will end up on the losing end:

“Regardless of the sales strategies used, the companies will have to grow substantially in order to reach values at which the Treasury would recover the entirety of its equity investment upon sale of its equity, which the Treasury and others consider to be unlikely.”

I believe that the Treasury needs to find a way to sufficiently explain to Congress and taxpayers how and why a decision was made to sell off the government’s interests. However, I can see this being a significant challenge for an agency that has been less than forthright in explaining the strategy behind its other bailout programs.

http://www.gao.gov/new.items/d10151.pdf

Morgan Duff

MPG, EPA and SUV

New EPA data released yesterday demonstrates how a recession can affect buying habits of consumers and overall mileage ratings. Also, the Obama administration has been working on increasing average MPG numbers for years to come.

New 2009 models have been reported to be 7% more efficient than the vehicles sold in 2008, on average. It has been reported to be the largest increase in average fuel efficiently in the last three decades. All major automakers had increased their average fuel efficiency of their model lineup, except for Chrysler which sold more SUVs and pickups in 2009 than smaller cars. Automakers with the highest increase in mileage numbers include Japanese companies like Toyota and Nissan.

On average 2009 cars and trucks are lighter too, with average car weight decreasing by 4% and truck weight shedding an average of 100 pounds.

At the same time, the White House is making plans for sweeping new standards starting in 2017. They currently have in place a goal of 35.5 mpg (on average) for 2016. However, many wonder if these numbers would have looked so good to environmentalist if there wasn’t a recession. Projections for 2010 show no real improvement as gas prices are going down, the economy is recovering and people feel more comfortable buying bigger cars.

What I find surprising, and somewhat baffling, is why these numbers are such improved. Most people who know anything about the industry realize it takes many years to totally revamp a model lineup. Essentially making most of the models available for 2008 the same that were in the showroom in 2009. Clearly these numbers are driven by what kinds of vehicles are popular in a given year. High fuel prices and an uncertain economy made 2009 the year people bought small but it doesn’t seem this trend will continue.

I really don’t believe in fuel economy standards and I think they blind automakers to doing what they really need to do—improve the overall automobile. As the last few years have shown, gas prices are the biggest driving force in more fuel efficient cars sales. It is at these times when consumers demand better mileage ratings and new fuel technologies. If automakers must follow government guidelines, showrooms will be full of small cars no one wants just to keep average mileage numbers down to satsidy government standards. The result is freakish products like the Aston Martin Cygnet which is designed to balance out averages with Aston Martin’s gas-guzzling super cars. Simply put, if government really wants to get more fuel efficient cars on the road, they should increase gas prices through taxation. It would be effective but not welcomed by anyone.



http://www.nytimes.com/2010/11/18/business/energy-environment/18fuel.html?src=busln

GM IPO: It's Kind of a Big Deal

On Wednesday (the 17th), GM announced its IPO, priced at $33 a share, a bit higher than expected. It will turn the US government into a minority shareholder (as opposed to holding 61%), paying back billions of dollars to American taxpayers. Here's a rundown of the IPO from the WSJ:

After the market closed Wednesday, Wall Street underwriters set the price on 478 million common shares, with another 71.7 million expected to be sold if bankers exercise an overallotment option known as the green shoe.

The underwriters also boosted the size of a planned preferred stock offering to $4.4 billion, which could also be increased in the green shoe by another $650 million. If the decision is made in the next few days to exercise both overallotments, the deal could raise a total of $23.1 billion.

The deal grew in size over the past few weeks, driven by better-than-expected demand from U.S. mutual funds, according one person familiar with the deal.

Proceeds from the sale largely will go to the U.S. government, which owns 61% of GM after restructuring the car maker last year in bankruptcy court.

The auto maker has returned $9.5 billion of the $49.5 billion the U.S. spent to rescue GM last year. The Obama administration will seek to recoup the rest through the sale of stock over the next couple of years.

Dennis Berman and Simon Constable discuss how GM's underwriters achieved a high opening price for GM's IPO, an effort that will help to return billions of dollars of taxpayer bailout money to the U.S. Treasury.

The U.S. Treasury, which has kept close tabs GM's operations since bailing out the auto maker last year, will reduce its oversight role after initial public offering on Thursday, people familiar with the matter said.

This is great news for everyone involved in my view. After the IPO, the US taxpayers will have about 2/5ths of their bailout money repayed. GM will have an infusion of capital, in conjunction with the federal government's role in oversight reduced.

How about the investors? What does GM going public again mean for them?

James B Stewart, writing for Smart Money, has this to day:

Along with other automakers, GM should benefit from cyclical trends in its favor. After the recent financial crisis and severe recession, there’s tremendous pent-up demand. An improving economy, higher employment and rising consumer confidence should translate into solid growth in North America, and GM should fare even better in emerging markets (in which it has the largest market share).

So let’s concede this is a good time to be buying auto company shares, and that GM in particular seems an attractive candidate for further market share gains. How do the numbers look?

Price-to-earnings math gets tricky, because quarterly earnings have been erratic for car makers over the past year. If we assume the most recent quarter is representative of quarters to come, GM trades at 5.1 times earnings compared with 8.5 for Ford at 8.5, 26.8 for Toyota and 10.2 for Honda. In other words, GM still looks cheap.

This may in part reflect the political and business reality that this is an initial public offering that can’t afford to flop. A successful offering is essential to GM’s campaign to shed its old stodgy, loser image and shed the taint of government ownership. And the government (which doesn’t seem to be meddling in day-to-day management but remains the largest shareholder) needs a successful offering to enhance its prospects of recouping the massive taxpayer investment.

Of course there are risks, as in all IPOs. There’s a list of them in the GM registration statement. While I’m encouraged by GM’s progress, I believe it still has a long way to go before it achieves its vision of building the world’s best cars. Based on my last visit to the auto show, I’d say its new product line up doesn’t yet match Ford’s. But it has plenty of new vehicles in the pipeline, including the much-anticipated Volt.

So my advice is, call your broker and ask if you can get some shares. (Thirty-five underwriters are participating in the offering.) I intend to. Demand seems to be running high, and if my analysis is any indication, it’s no wonder: Within the stated offering range, GM shares are a great deal.

Another writer for Smart Money, Alyssa Abkowitz, adds more to the case for buying GM:

Does GM really deserve the flashy IPO parade? On paper, the reengineered automaker boasts a phenomenal balance sheet, with strong cash flow, and a conservative price-to-earnings valuation, even after the pre-IPO bump. In the third quarter, the company posted earnings of $2 billion on sales of $34 billion – its biggest profit in more than a decade. Analysts note that better pricing has helped the company’s profits; the new Buick LaCrosse, for example, sells for about $7,800 more per unit compared to last year. “Simply put, GM makes products that consumers are willing to pay more for than they once did,” notes David Whiston, an auto analyst at Morningstar. GM also has a strong presence in China and other emerging markets where auto demand is growing. That’s one reason, says Schuster, that “there’s good reason to believe the company will outperform.”

If results from its primary rival, Ford (F: 16.68, +0.17, +1.02%), are any indication, GM’s shares could thrive. Ford is on track to post its first consecutive annual profit increases since 1993 – all while being celebrated in the media for avoiding bankruptcy and a bailout. “Ford is trading really well,” says Matt Therian, an analyst at IPO research firm Renaissance Capital; its shares are up by 60% since mid-summer. But by some measures, GM is actually performing better than Ford: in the third quarter, for example, Ford earned about $2,700 in profits per vehicle it sold in North America, while GM earned around $3,000 for each vehicle.

Of course, there are still plenty of reasons for investors to be skeptical. For one, GM’s common stock investors won’t see dividends for a long time. That’s because the government has to get more of its $49 billion investment back from GM before any penny goes elsewhere. While the company has crept into the black, its sales are still far below their pre-wipeout peaks. There’s also the question of how long the “Government Motors” stigma will hang over the company and whether the auto giant’s financial restructuring has addressed all its issues, including its continuing obligations to retirees. “Investors will remember the problems of the old GM,” Therian says, and that could weigh down the stock price.

It seems to me that the benefits outway the costs. Anyone who wants to invest in the auto industry MUST give GM a long look. Auto sales are starting to rebound, so now is a great time to buy.

For more on auto industry investing, here's a great piece by Jonathan Hoenig:

http://www.smartmoney.com/investing/stocks/fords-a-great-story-but-hondas-the-better-stock/

GM's Initial Public Offering

GM has declared it will price its IPO( Initial Public Offering) at $33 dollars a share, in what could be one of the largest U.S. stock offerings in history. The Price of $33 reflects a better-than-expected demand for GM shares. The deal could generate a total of $23.1 billion, with much of the proceeds going to the U.S Government, which currently owns 61% of GM.

The high profile GM's deal comes after solid months of increased profits by the company. The IPO will not only bring money to GM, but it will also reduce government's influence in the company, as the treasury department is expected to sell 412 million of its shares, raising $13 billion.

The event, in my opinion, is mostly positive. The Government will gain more than previously expected, helping for the repay of the 49 billion spent in GM's bailout. GM will be more autonomous as the government begins to sell its share of the company, and investor will fell more confident to invest in GM.

Right Management, who cares?

Who is to blame for the downfall of GM. When the economic crisis hit our country, we were left with a medley of issues to contend with. There was the housing bubble that popped, the insurance companies that needed bailing out and most importantly, the American auto companies, which were struggling to stay afloat. Should we blame management in this case or should we blame the economy?

According to the Wall Street Journal, it is management's fault to blame. This is especially the case for the head C.E.O at General Motors Company Holman Jenkins. Holman Jenkins' track record at the GM company was not as exemplary as he would have wanted it. It's even more embarrassing for Holman Jenkins since George W. Bush blames Holman Jenkins for a "decade of poor management" (wallstreetjournal.com). The tirade continues in the paper as he is berated for the drop in stock value. Although most C.E.O.'s would take the heat and generously accept any insults thrown their way, Jenkins goes ahead to dispel any bad word about him. He even goes to say that the numeric decrease in value of stock is not a valid measurement of a company's C.E.O's capability. It's believed that he is responsible for the downtrodden state of GM, and by the way he is dealing with the many criticisms, I can't believe anything but that fact. Generally, C.E.O.'s deal with criticism respectfully, declining to comment on the issue of their company. It all seems too defensive coming from a champion of capitalism.

There are too many issues to contend with when talking about G.M. Its C.E.O. being one major aspect. However, even as the C.E.O. is being berated by the media and criticized by his own words, it is hard for me to deny the fact that G.M. is doing better this quarter than the last. This quarter's performance although not as golden as the peak performance of 2007, shows that the C.E.O. is contributing his part into the company. I am to believe that he is not great at communicating with the media, but I believe that he is taking the company in the right direction and step by step rebuilding it to its former grandeur.

http://proquest.umi.com/pqdweb?index=2&did=2186586941&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1289934516&clientId=31806

Mr. Goodwrench Gone

Starting in February, the Goodwrench brand will be phased out by General Motors. The Goodwrench brand, also known as Mr. Goodwrench, is GM’s service sector image which was first used in 1974. The Goodwrench name can be found on dealership lots and signs throughout the country.

It was once thought to be a symbol of quality parts and service but GM now believes its image is too closely connected to the General and not connected enough to the core brands.

With fewer brands to manage, GM is hoping to individualize the service experience by having separate service brands for each of the remaining GM manicures.

I am not surprised by this move at all. GM does not want their logo or name near any of their products at this point. Consumers no longer see the GM brand as a sign of quality like they did when Mr. Goodwrench was first introduced. This follows a trend of differenciating and distancing the GM name from brands like Cadillac and GMC which are more respected. Several years ago, GM used to put a small badge on every car, no matter the brand, displaying the squared-off General Motors logo. They have gotten rid of these too now.

I support this move. With fewer brands to manage GM doesn’t need huge umbrella like dealerships or programs to service all products. Cadillac, Buick, Chevrolet and GMC can have their own programs and, more importantly, can distance their products from the GM name.


http://money.cnn.com/2010/11/09/autos/gm_goodwrench/index.htm