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The General Motors Debate


This company has proven that it cannot build a category killer car.


We listened to the call from Merrill Lynch on General Motors (GM) yesterday and came away with the basic conclusion that the analyst's argument is similar to the old Steve Martin joke: "How to make a million bucks and not pay taxes. First, you make a million bucks…"

A lot of their argument is that if the company can get a deal from UAW, then it can lever its pension fund assets, then it can reduce the number of divisions and get its notoriously unruly dealers in-line, and then it can increase sales (reversing market share declines), and then it can build a category killer car because when given the leverage it can do this. It's just that simple.

We pointed out yesterday that the series of events necessary and conditional upon each other is a very low probability. This makes no mention of the fact that this company, under the best of circumstances, has proven that it cannot build a category killer car.

The proposed fixes don't make sense. This is the second year in the row that analysts at this point of the year are buying into the idea that GM can stem cash burn and be FCF positive by next year. Yet, something always goes wrong. The only way GM did not lose as much money as it had in the past was by drastically reducing MAINTENANCE capex (ergo it is running down assets, which, given that liabilities are constant, actually worsens the company's capital structure).

In interest of full disclosure, he does make some good points:

1. GM's pension is not underfunded (it is the OPEB that is the problem).

2. GM's Asset Management has done a suprising job, returning roughly 14 percent last year. It did this by taking extra-ordinary risk; their asset mix was as follows: global equity 50%, global bonds 30%, real-estate 10%, alternative investments 10%. Unless it was all in stocks, there is no way it made 14% gross return without levering the portfolio. There is significant risk that they cannot repeat this feat, or do much worse.

3. If the UAW does accept the buyouts, it will reduce costs. This is true, but a low probability in its existing form.

Position in GM

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