Daimler-Benz's surprise $38 billion bid for Chrysler got a lot of people excited last week, but it failed to do anything for General Motors, whose shares remain among the most underappreciated in the stock market. Last week, General Motors stock inched up only 1/8, to 68 11/16. During the past year, GM shares have increased just 32%, while those of Ford have doubled and shares of Chrysler have surged 84%, including last week's post-announcement euphoria.
GM's problems include declining market share in the U.S., a dearth of hot models, and investor disenchantment with its management. What could change this picture?
Although GM is probably too big to be taken over the way Chrysler was, the company certainly has the ability to prod its stock price upward. GM right now is sitting on assets that many believe are worth more than $100 a share. "I clearly see the valuation and the opportunity for GM. The sum of the parts are worth a lot more than what GM trades for now. My problem is that this opportunity has been there for years and GM management has failed to capitalize on it," says Michael Jamison, managing director at Brandywine Asset Management.
Yet the Chrysler deal might be enough to prod GM's conservative management to take action. For starters, it must gall GM executives that Daimler is willing to pay $38 billion in stock for Chrysler, a company with about a third of GM's total annual auto sales and none of GM's global clout.
In aggregate, GM's shares are valued in the market at only $46 billion, making it the nation's 50th-largest company as measured by stock-market value, down from third place in the early 1970s. Haughty GM brass have to believe their company, which is still the world's largest auto maker, is far superior to scrappy Chrysler.
One big fan of GM stock is Kurt Feuerman, a portfolio manager at Morgan Stanley Asset Management, who was the subject of a Barron's interview two weeks ago (Power of Concentration, April 27). "At GM's current price, you're paying nothing for its auto business," he argues, pointing out that GM's stakes in various non-auto businesses, plus its cash hoard, are probably worth more than the company's current stock price.
Ticking off GM's attributes, Feuerman says it has one of the most aggressive share-repurchase programs in Corporate America, a rock-bottom price-to-earnings ratio of about eight based on estimated 1998 profits, a cash-rich balance sheet, plus a valuable interest in Hughes Electronics, whose tracking stock is traded as GM H.
One of GM's best assets is its 74% interest in Hughes, the telecommunications and space company that also owns DirecTV. GM's interest in Hughes is worth about $24 per GM share based on Hughes current price of 55 1/2 . GM also has net cash of $14 a share. This means investors effectively are getting GM's auto operations, plus Delphi, GM's parts business, and General Motors Acceptance Corp., the finance company, for about $30 a share.
GM is expected to earn about $8 this year, with hardly any of those profits coming from Hughes. So GM trades at about eight times profits, versus a P/E of 10 for Ford. But GM's multiple is just 5.5 when Hughes is excluded, and only 4.0 when Hughes and the cash are taken out.
David Bradley, J.P. Morgan's auto analyst, calculates that GM's pieces are worth over $105 per share, 50% more than the current stock price. GM has downplayed talk of a Hughes spinoff, saying Hughes is a "strategic asset." That view could change, however.
Ford long maintained that it needed to hold on to its Associates First Capital unit, only to reverse that position and spin off the operation to shareholders last month. During the past year, Ford investors have doubled their money, thanks to the big gain in Associates First Capital stock and the automaker's own solid profit performance. In this atmosphere, expect GM to face growing shareholder pressure to spin off Hughes.
GM has said it may sell a stake in Delphi to the public, but there's no timetable for such a move. Feuerman believes such a sale, a prelude to a potential spinoff, could come next year. Delphi is estimated to be worth about $16 per GM share. GMAC is likely to remain a part of GM because of its key role in financing purchases of the company's cars. Based on its profits, however, GMAC is worth about $24 a share, according to J.P. Morgan's Bradley.
Add up the value of Hughes, Delphi, GMAC and GM's net cash and you get $80, $11 more than GM's current share price. This means the auto business is effectively being accorded a negative value.
Feuerman says Street analysts get too hung up on such matters as GM's market share in autos while paying little attention to the powerful financial story at the company.
Take the repurchase program. IBM gets plenty of publicity for its aggressive share-buyback program, but GM's plan is nearly as large and has a bigger impact because of GM's smaller market value. GM has bought back $5.3 billion of stock, or about 12% of its outstanding shares, since the start of 1997. GM spent $1.6 billion on buybacks in the first quarter alone, equal to its entire net income. Feuerman believes GM could retire over 10% of its stock in 1998.
It's amazing. Since 1965, GM's market value has increased by just over 50%, while the Dow is up tenfold. Given 33 years of underperformance, GM is unlikely to make up all that lost ground, but it may be entering a period when it rewards its long-suffering shareholders.