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General Motors: Debt-Free and $21 Cash per Share


Despite the hype about the US auto industry's comeback, its shares seem unlikely to accelerate in the near term. But for long-term investors, some car companies are worth a look.

Pension Fund Obligations

Unlike most of their global competitors, GM, Ford, and Chrysler are saddled with large legacy pension fund obligations. At the end of 2011, GM alone had $134 billion in pension obligations ($25 billion unfunded). If the companies can't meet these obligations, the already financially strapped Pension Benefit Guarantee Corporation (or PBGC) may need to take them over. Taxpayers may, once again, need to foot the bill if the PBGC itself needs a bailout.

To their credit, the auto companies are making efforts to reduce the liabilities with buyouts and management changes.

Subsidies: A Sugar High?

Have you have wondered why your pizza delivery boy drives a Lexus? Well, it's easy to get a car loan nowadays, even if you have lousy credit. The Fed's zero interest rate policy is helping fuel a boom in sub-prime auto loans.

Generous subsidies (bailouts, tax credits, long-term low interest loans, etc.) to automakers and auto loan companies such as Ally Bank (formerly GMAC, now 64% owned by the US government) help keep US auto sales artificially high.

As the solar industry has shown, when subsidies are discontinued, share price declines can be brutal. Some say the government is now subsidizing a highly dysfunctional auto industry--and it will end badly.

Japan is Back

In March 2011, a devastating earthquake struck off of Northern Japan, triggering a deadly tsunami. In addition to killing thousands, the tidal wave severely disrupted Japan's auto industry and port traffic. Japanese vehicle production plunged. Toyota (NYSE:TM) and Honda (NYSE:HMC) are now seeing sales rebound as they reclaim lost market share.

Meanwhile, South Korea's Hyundai (KRX:005380), the world's fastest-growing automaker, is reporting record sales, both in the US and globally, while Volkswagen (ETR:VOW) continues to do very well in European and Chinese markets.

All this portends fierce competition for US automakers, both in their home country and overseas.
No positions in stocks mentioned.
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