General Motors: For The Long Haul

Over the last several years, the auto industry has been plagued by a series of problems. Its woes include, among others, contentious union contract negotiations and questionable pension funding plans. There has also been worries of rising interest rates, gas prices, and a slowing economy that could put a serious damper on new car sales. Still, there is one company I think stands out among the big automakers, and that company is General Motors (GM).

To be clear, General Motors faces all of the macroeconomic challenges that its domestic and overseas competitors, including Ford (F), Daimler Chrysler (DCX), Toyota (TM), and Honda (HMC), encounter. But its footprint, in terms of product offerings, and its financial size and ability to survive difficult economic conditions makes this stock, I believe, attractive at current levels.

In fact, there are several things that attract me to GM shares. First off, I like the fact that billionaire investor Kirk Kerkorian, whose firm Tracinda Corp owns 9.9% of the outstanding GM stock, is looking to enhance shareholder value by aggressively proposing combinations and alliances that could spur the share price higher.

Earlier this month, Kerkorian, who has a reputation for being a savvy investor in U.S. auto makers (he earned a reputation for getting in early on Chrysler in the 1980s), proposed to GM's board that it consider an alliance with Nissan and Renault.

For its part, Nissan/Renault's CEO, Carlos Ghosn, favors exploratory discussions pending the GM board's approval to officially conduct the talks. Note: Further news about the proposition should be available this week.

So why is a combination or alliance with Nissan/Renault a good thing?

For starters there could be a large number of synergies. The two could combine marketing forces, as well as save a bundle on administrative overhead. It would also give GM an even bigger footprint. In fact, if a combination were to be consummated, the company would have an annual production of about 15 million vehicles in Europe, the U.S. and Japan combined.

It would also, in turn, give GM an even greater diversity in its revenue streams – a good thing given the potential for economic weakness in the US.

Another thing I like about GM is that management is aggressively working to trim headcount amid concerns of higher interest rates and a waning US economy. Earlier this year, management outlined plans to close 12 plants, and said that a total of 35,000 hourly workers have agreed to contract buyouts or early retirement deals.

These moves alone will save the company a small fortune, estimated at $1 to $2 billion plus in annual labor (health care and actual labor) costs, and related taxes.

Beyond that, GM has about $18.8 billion in cash on its balance sheet. And although it is fairly well leveraged, with about $277 billion in debt, it shouldn't have to raise cash (through the issuance of stock) in the open market, thereby diluting shareholder value. In fact, the company has done a host of things internally to make certain they will be able to meet their debt-servicing obligations.

For example, it reduced the board of directors' compensation by 50% (to $100,000), it cut CEO Rick Wagoner's pay by 50% (to $1.1 million), it capped company health care contributions for 26,000 current employees, and some 100,000 retirees. It also cut its annual dividend by $500 million. Again, all of these actions are proactive, and are a good sign that management is focused on enhancing shareholder value.


We are also starting to see some of the biggest "bears" on the stock come around. Banc of America analyst Ron Tadross has rated the stock a "sell" for some time, but recently raised his rating to "neutral." I've also seen Caylon Securities raise its rating from "Add" to "Buy."

The fact that Wall Street is starting to recognize the company's cost reduction efforts is indeed a good sign. And as Wall Street warms to the story, I expect to see more bullish research on the company.

In short, the story at GM isn't clean cut. Macroeconomic conditions make its near-term earnings outlook a bit uncertain. But the fact is that management is doing things that will enable the company to contain costs as it rolls out its next year's product line. And based upon the improving fundamentals, I think the stock is a buy in the $29 range for long-term investors.

Those wanting to better-time their purchase, might be better served by waiting to hear additional details of a proposed GM/Nissan/Renault alliance. If management starts talking about the potential for big cost savings and revenue enhancing opportunities, as the result of a combination, I think the stock could go materially higher.

Conversely, if a deal is nixed, or the board fails to see adequate cost savings in the near term (meaning less then five years), I think the stock could remain in a bit of a holding pattern until the macroeconomic picture clears.