It is not hard to imagine a time in the not-too-distant future when General Motors Corp. will not exist. In fact, a lot of investors are imagining such a scenario.
Hampered by bloated costs and nimble foreign competitors, which are dining out on the Big Three's market share, GM's stock price has been decimated in recent years. Profits have turned to losses and the once-hefty dividend has been cut in half.
GM's shares peaked in 2000 at $93.63 (U.S.), when oil was cheap and SUVs ruled the roads, but have since meandered to yesterday's close of $21.96, down 39 cents or 1.7 per cent. Meanwhile, Toyota Motor Corp. has taken over as the world's biggest auto maker and upstarts are appearing in China and India.
The GM-is-dying argument is certainly compelling, which is why the stock is down 75 per cent over the past eight years. But what is more interesting, and potentially more profitable, is the argument in favour of the auto maker's survival. If GM can turn things around, the stock is certainly worth more than its current sickly price.
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A number of savvy institutional investors, not exactly prone to making silly guesses, are making big bets on a recovery. In fact, the more the stock falls, the better it looks to these value-oriented types who thrive on widespread negative sentiment.
Legg Mason increased its holdings in GM by 5.4 million shares at the end of 2007, bringing its stake to 15 million shares. Southeastern Asset Management owns 41 million shares. And State Street has an amazing 79 million shares. Collectively, these holdings are worth almost $3-billion, which means these fund managers are not exactly taking a flyer on the stock on the off chance that it survives.
What are these investors thinking? Yes, they are betting that GM survives, as the giant slashes payrolls and makes more moves into emerging markets, where growth is in the double digits. They can point to the fact that revenue in GM's core automotive business is actually growing, belying the impression that no one drives GM's vehicles any more.
But just as important, they argue that the auto maker's shares have sunk far below their "intrinsic" value - an estimate based on what they feel the company is really worth, which is different than what the market thinks it is worth.
For example, Southeastern Asset Management firmly believes the shares are worth more than $60, even after they factor in declining sales expectations for 2008, record-high oil prices and mortgage-related writedowns at GM's financing unit, GMAC - which is the sort of stuff that gives many other investors the willies. In other words, Southeastern sees an upside of about 160 per cent from today's prices.
Right now, GM's shares are priced for disaster. But if disaster is averted - a bet that is by no means far-fetched, even with the U.S. economy on the edge of recession - then the shares are worth more. Much more.
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