DUMB LUCK INVESTOR: How Dumb is Detroit?, Peter D. Henig
Monday March 14, 11:30 am ET
It's always fun to match fact against fiction – or in the case of GM (GM) and the other Big Three automakers, fact versus fantasy.
First, some facts: Higher fuel prices are hurting overall sales of SUVs and pickup trucks, sales which account for nearly 80 percent of North America automobile profits at GM and Ford (F). GM's domestic SUV sales declined by 9 percent in February while Ford's sales in the same category dipped by 8 percent. (Interestingly, sales of Toyota's Tundra pickup truck and Nissan's Titan each rose by nearly 50 percent for the month.) Overall, the SUV segment lost 1.2 percent market share during January and February 2005; the pickup truck segment lost 2 percent market share over the same period.
Companywide, GM's sales were down 12.7 percent across the board for February. Meanwhile, fuel efficient compact cars gained 2.2 percent market shared during those same two months.
More facts: GM sold a total of 9 million vehicles in 2004, up 4.1 percent from a year earlier while Toyota increased its sales by 10 percent to 7.5 million vehicles, heading to sales of 8 million cars and trucks in 2005. (Even GM's CEO, Rick Wagoner, had to concede that Toyota could overtake GM as the world's largest automobile manufacturer.) Moreover, sales for Toyota's mar! ket leading hybrid, the Prius, are booming. The Prius owns 60 percent of the hybrid market, and Lexus, Toyota's luxury brand, is introducing its first luxury hybrid SUV, the 400h, for which it has already taken 12,000 deposits and has plans to sell 27,000 units annually.
GM's response? Bob Lutz, Vice-Chairman of General Motors has stated that hybrids, “just don't make business sense.†Here's where fantasy and fiction come into play. GM loves gas-guzzling heavy metal because that's where they make their fattest margins. Fat margins please Wall Street because they imply even flat or declining sales might still yield plump bottom lines. Thus, investors should still, theoretically, be bidding up GM's stock. In fact, it would seem that Toyota, what with its more fuel efficient line-up of thinner margin vehicles, would be no match for fat and happy Detroit. Moreover, if we were to take Lutz at his word, hybrids would be such a dumb business to invest in – they barely make any money at all on those Priuses – Wall Street should actually be penalizing Toyota for placing any emphasis on those markets at all.
But, as the saying goes, markets never lie. So as GM trades at 6 times trailing earnings to Toyota's 11 times trailing 12-month EPS, and as GM's stock suffers near its 52-week lows at roughly $33 per share, down 30 percent over the last year, either Lutz is crazy or blind or Detroit is deaf or dumb. My hunch is it's as much a strong dose of the former as it is a good helping of the latter.
Poor GM
When death is knocking on the door, it's sometimes better not to answer.
Besides declining sales and loss of market share, GM's got a few other things stacked against it. First, it's got an $86 billion ! pension fund it must manage and that's a big, expensive, time-consumin g proposition. Second, in covering 1.1 million workers, retirees and dependents, GM is the single largest healthcare provider in the nation – and that doesn't come cheap. GM spends more than $5 billion a year on medical bills -- the equivalent of $2000 per car. (Toyota, by the way, spends a minimal amount, if any, on healthcare, as it is offered largely free of charge by the Japanese government.) Last, any of the foreign manufacturers who have become interested in locating here have likely garnered rich tax incentives for years to come – tax savings the Big Three don't enjoy.
Though the yen has gained mightily against the dollar, making imports expensive and US goods cheap, that dynamic still hasn't played out as strongly as the Big Three would have hoped. Car buyers still want the cars they love to drive; and the cars they love to drive are hardly those made! by Ford or GM these days.
Financially, though GM still has roughly $23 billion in cash, it is also nearly $3O billion in debt. And its solution? The company says financially things should improve significantly in 2006 and 2007 because that's when a new generation of, yep, large sport utility vehicles and pickup trucks hit the market. Why would GM try and fix what ails it with – well, what ails it? Perhaps it's addicted to large vehicle sales and those fat margins, margins that are supposed to rekindle its bottom line; but won't. Perhaps, it (alone) thinks the price of fuel at the pump is going to come down, or at least flatten sometime soon; they won't. Perhaps it's convinced that the mystery of hybrid fuel efficient vehicles is such a niche market it's ok to sit that one out while market penetration and market share for Toyota just grows and grows and ! grows.
Or perhaps, as one of the largest companies in the world , it simply believes in its own manifest destiny – and if so, that's dangerous territory within which to tread.
It's my opinion that the world is passing GM right by. Toyota is proving this as we speak. It may take a year, it may take 10 years, but GM needs a radical makeover (starting with an equally radical change in CEO) in order to execute the turnaround of the century. Will it happen? I doubt it. Wagoner is no Lee Iacocca, the former Chrysler Chairman who turned that company around when it was on the brink of disaster. GM would have to kill its own love affair with large trucks and SUVs, ditch its healthcare responsibilities, and get rid of its heavy debts in order to retool for a coming world where higher fuel prices are here to stay. That's a lot of heavy lifting for a company so in denial it sees hybrids as just a passing fancy. The stock, unfortunately, ap! pears headed nowhere but down.
Peter D. Henig
Contributing Writer and Trading Strategist
Optionetics.com ~ Your Options Education Site
GM Missing the Boat on Hybrids
Discussion in 'Prius, Hybrid, EV and Alt-Fuel News' started by tomforst, Mar 14, 2005.
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Discussion in 'Prius, Hybrid, EV and Alt-Fuel News' started by tomforst, Mar 14, 2005.
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