Dueling Fools
GM Tough
The Bear Rebuttal
By
No question GM has improved operations and profitability over the last decade, and no question it's cheap compared to the S&P 500. That doesn't make it a good investment.
GM is cheap for a good reason, namely enormous overhead and intense competition, which means much of the company's growth may have to come from operational improvements rather than big sales and increased market share.
Look at the company's 1999 model year vehicle sales, its best year since 1989. GM sold 5,006,076 vehicles, up 9% overall from last year, according to the company. You have to look at 1998 to put that in context. Model year 1998 truck sales increased 4.6%, which is excellent, but car sales dropped 8.1%. So this year's 8.3% increase in car sales brings the company back just above the 1997 level.
While it's true that GM is focusing more on trucks because of better profitability, its success selling them doesn't change the fact that model year car sales are pretty much at the same levels achieved two years ago. Do you want to invest in a company that, in a major product line, has yet to return to a peak hit in 1997? GM's North American market share fell in 1995, 1996, and 1997.
As for arguing that GM is cheap on a price-to-sales basis, that's no way to measure the value of a mature company. For a start-up Internet company, fine, but not for a company that introduced the first electric headlamp.
That's because companies grow the value of their stock by increasing earnings per share (EPS), not sales. On this front, GM had basic EPS (from continuing operations) of $4.26 in 1998, down from $8.70 in 1997 and $6.07 in 1996. Now, this again includes the big strike year, but you can argue it both ways.
Paul said analysts expect earnings of $8.14 per share in 2000. That sounds impressive if you want to count the strike year. Otherwise, it actually represents negative EPS growth from 1997. Just to get back to the 1997 level, GM needs to earn at least $8.70 per share. From this point of view, I'd argue that the company is overpriced at 8x earnings, at least in terms of growth prospects.
Finally, although GM has improved operations, shareholders need to measure that against the potential of other investments, not just where GM has come from. Paul pointed out, for example, that GM's revenue per employee stands at an impressive $290,000. Well, Ford, which is selling at a forward multiple just over 9, generates about $418,000 in revenue per employee, easily outdistancing GM.
GM has made nice strides, but it's not even the class of its industry.
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