Thursday, December 29, 2005

GM Is Still an Ugly Stock Buy

On January 4, 2004, General Motors’ (GM) stock sold for $48.11. Today as I write this column, GM’s stock is selling for $18.45. For the value conscious investor, this could signal a buying opportunity with next year’s earnings projected to grow to $1.06 per share from 2005’s loss of $4.13 per share. My advice is to stay away from this stock. I think there is the real possibility that the price of this stock could go even lower with even the potential for bankruptcy. What are the warning signs?

The number one signal was a letter written by GM’s CEO published recently in the Wall Street Journal. In this essay, Mr. Richard Wagoner pleaded for a “level playing field.” In other words, Toyota, by making different and wiser long run decisions, has inherent advantages that will destine GM to be a second rate competitor for the long term. He never explicitly stated it in this pathetic essay, but what he is really calling for is government intervention.

Despite the fact that GM’s U.S. sales were roughly twice that of Toyota’s, GM bled stockholder value for each auto sold this year. In 2005 for each vehicle sold, Toyota earned $1,488, while GM lost $2,331. I would not be surprised to hear Mr. Wagoner contend that GM will make up for the shortfall with increased volume.

Let me give you some other facts derived from the Harbour Report and the Center for Automotive Research. In 2005, it took GM 34.3 labor hours to produce a vehicle while Toyota produced a vehicle with 27.9 hours of labor. Furthermore, GM paid its workers $31.35 per hour and Toyota paid its U.S. workers $27 per hour. But the real difference was in health care cost per vehicle. Per vehicle, GM spent $1,525 and Toyota paid $201. Combined this meant that labor costs per hour were $73.73 for GM and $48 for Toyota. Mr. Wagoner gave no hint how management at GM would deal with this huge and negative differential.

To reassure the investing public, Wagoner should have indicated in his rambling column how GM was going to trim its labor cost and become more productive. Instead he is paving the way for either a government bailout or bankruptcy. Unless management and labor at GM get serious about the real hurdles facing the company, GM will be known to future generations as “Grandpa’s Mistake.”


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