Musings On Markets

Is GM a proper managed firm? The answer might have experienced 1925 yes, when GM was the car industry’s disruptor, challenging Ford, the set-up innovator in the business at that time. It would have definitely been affirmative in 1945, when Alfred Sloan’s strategy of letting GM’s many brands operate independently won the automobile market race for GM, and it was the biggest and most profitable vehicle company in the global world.

It may have still been positive in 1965, when GM was together with the world, a key driver of the US economy and US equity markets. 11.2 billion in the bailout. 25.5 billion in assets (in place, equipment, and working capital) to it base. Fortunately that income has risen, albeit at an anemic rate (3.56% a calendar year between 2010 and 2014) but the bad news is that these increasing profits have been accompanied by declining success. In 2011 Even, the best of the five years in conditions of profitability, GM’s return on capital of 6.86% lagged its cost of capital. Does this imply the prevailing management of GM is not up to the task?

Not necessarily, since they were dealt a bad hand to start with. These were saddled with brand names that evoke nothing but nostalgia, a cost structure that put them at a drawback (still) in accordance with other car companies and a legacy of past mistakes. My measure of the quality of a business is easy as well as perhaps even simplistic.

12 weeks leading into January and attained 6.47%, a bit more than 1% below the collective cost of capital of 7.53% that I computed for car companies. Considering that the business model for vehicle companies appears to have damaged down, it should come as no surprise that the business has been targeted for disruption. While I have argued against the pricing premiums that the market is spending money on Tesla, it is undeniable that it’s entry into the market has seemed in the investments that other auto makers are making in electric cars.

Given their history of poor profitability, I’d not be surprised if the next big disruption of this market originates from companies in much healthier businesses and that provides more stresses on existing vehicle companies. When there is a light at the ultimate end of this tunnel for incumbent car companies, I don’t see it.

A GM Buyback: Value Effects? Looking at the picture, I could understand why activist investors were pushing GM to come back more cash. It is a middling company in a bad business, where even the very best companies battle to earn their costs of capital. 5 billion, instead of buying back stock. Invest the money: GM could have invested the money back to the auto business, but given the state of the business and the returns generated by players in it, this throws good money after bad effectively.

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25.5 billion in reinvestment did for GM in the last five years, I think a stronger debate can be produced that they would perhaps have been better off not investing that money and returning it to stockholders as well. Hold the cash or pay down debt: Auto companies are natural cash hoarders, arguing that as cyclical companies, they need the money to survive another downturn or recession. In fact, that argument seems to have added resonance at a company like GM, which has emerged from a near-death experience with default just.

At the risk of sounding heartless, I’d counter that survival with regard to survival makes little sense. A company is a legal entity and there’s a corporate life cycle, a right time for you to be born, a right time to grow, a time to harvest and lastly a period to shut down.

11 billion already. Do you want to do this a second time around with GM really? Return the money to other stakeholders (labor, the federal government): You are able to argue that my view of buybacks fails to take into account the interests of other stakeholders in the firm, its workers, its suppliers as well as perhaps even the government. 5 billion to provide its employees raises and replenish their pensions.

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