The U.S. Treasury's sale of a large chunk of its stake in General Motors is more noise than motion, at least for now. The auto maker is buying back 200 million shares for $5.5-billion (U.S.), reducing Uncle Sam's ownership stake to just under 20 per cent. And Treasury is promising to sell its remaining 300 million shares in the market over the next 12 to 15 months. GM's bosses will be happy. But the move isn't likely to send the company's stock price soaring.
The price GM is paying – a 7.9-per-cent premium to Tuesday's closing price – values GM at 7.4 times next year's estimated earnings, according to Thomson Reuters. Local rival Ford is currently worth eight times estimated 2013 net income. Ford's slight premium is justified by the two Detroit manufacturers' relative performance. Ford cranks out better pre-tax margins, is further along in its overhaul, and has executives with a longer track record of success. As a secondary factor, it has no taxpayer cash on the books.
Both firms probably deserve to trade at higher multiples in any event. While they are both restructuring their money-losing European arms, their overall operations are still producing decent margins and generating cash. That should be fuel for their stock prices.
But investors aren't thinking that way. European woes and worries about the pace of Asian growth are trumping the two companies' remarkable profitability in North America. Many other car makers also trade at levels implying slow or no expansion. BMW's price-to-earnings ratio stands at 8.8 times 2013 estimates, for example.
Turning this sentiment around is what might really light a fire under GM's share price. Sure, the Treasury's announcement did provide a bit of a boost. And GM executives will love losing the "Government Motors" tag – perhaps partly because, once the government is gone, restrictions on executive pay will also go.
But those aren't very powerful reasons for Treasury to sell stock at roughly half the price needed to break even on its entire investment in GM. The $5-billion loss on this chunk now means it would need to get almost $70 a share for its remaining stake to make taxpayers whole. Taxpayers would have done better if Treasury had waited.