The End of General Motors?

The stock price of General Motors dropped almost 23% today, to a 60-year low of $3.36. The list of reasons for the company’s horrendous recent stock performance is expansive, but today’s sell-off was primarily triggered by two analyst’s new price targets for the stock price. Barclays believes it will hit $1.00, while Deutsche Bank has set a target of $0. Zero. Nothing. Nada.

It’s hard for me to conceive of this, but once-mighty General Motors may actually soon be worth nothing at all. In fact, if current trends continue, I feel this is unavoidable. A government bail-out could buy some time, but in my most optimistic thought exercise scenarios I don’t see a way out of this.

What does it mean for a stock to be worth zero? Well, there are a couple ways to look at it. Generally, a stock price reflects an expectation of future earnings. So, a stock price of $0 means that the expectation is that the company will never again make a profit. Ever. If you believed that the company would eventually be profitable, the stock should still have some value—a low value, to be sure, but not zero.

There’s another way to look at is this. Earnings (profitability) is a function of both revenue and expenses. Right now, GM can’t increase revenue, because nobody wants to buy cars (anyone’s cars), and even if they did, securing financing is difficult right now. So, all GM can do is control the expense side of the equation, by doing things such as reducing its workforce, idling factories, and selling under-performing assets like the Hummer brand.

But a stock price of zero reveals a deeper problem. It means that even if you sold off all of the company’s asset and then subtracted all of its liabilities (money it still owes), you’d have nothing left (or even still owe money). Put differently, if you sold off all of GM’s currently unsold vehicles and parts inventory, all of its facilities and the land they’re on, all of its manufacturing machinery, all of its computer systems, office furniture, staplers—literally everything—all the money you’d collect wouldn’t be enough to pay its current bills or other existing financial commitments. Complicating this severely is that it’s hard if not impossible to find buyers for any of GM’s assets, let alone at good prices. So even in a “fire sale” situation, investors would be left with nothing. Hence the $0 price target.

So GM is in the perfect storm. Sales are a standstill. Liabilities are climbing. It has assets, but can’t sell them. And the company will be out of cash in a few months. Unless you believe that a multi-billionaire (an oil sheik, perhaps) will sweep in, buy GM, and somehow turn it all around, I think Deutsche Bank’s estimate is fair.

I’ll talk more about the fate of the auto industry in future posts. But man, it’s depressing to think about.


One response to “The End of General Motors?

  1. I grew up in a General Motors factory town. It was my desire to understand GM that led me to subscribe to Fortune at age 12 and embark on a business career. I recently tried to build a museum about the car and the road but could not raise all the funds. I have the original first year annual report of GM that was owned by the man who later became President, Pierre DuPont. I keep a list of the “lessons from Detroit” that today’s technology leaders could learn from Walter Chrysler, Alfred Sloan, and Henry Ford. The bottom line is that I am immersed in GM and auto industry history.

    Thus I have a multitude of thoughts and questions about the bailout, including these:

    If American manufacturing, especially of traditional automotive products, is so impossible, why are Paccar, Caterpillar, Deere, and Cummins at the top of their game? Where is their government bonus? Do we discriminate against them because they did not fail and were not mismanaged?

    If we wanted to save the auto industry jobs, why now? I believe they have already laid off well over 50% of their employee count, starting from their peak levels. What about all those other folks who have already lost their jobs? (27,000 in my home town alone.)

    Do the unions share none of the blame for what happened? What is the correlation between the politicians who cater to the unions and those most in favor of the bailouts? Shouldn’t we at least give equal sums to these companies’ non-unionized competitors to be fair to those workers and their employers?

    Last I checked, the US is still the world’s largest auto producer. But this would not be the case were it not for the Asian and European auto companies who have built massive plants throughout the US. Their suppliers have added thousands more American jobs. So do we punish these companies by giving handouts to their competitors?

    If we are going to take money from taxpayers and give it to auto workers, why don’t we take the money only from anyone who bought a first generation Beetle, Civic, or Corolla, back when they were still made overseas? Or anyone who buys a foreign-made car today?

    And if we really want to help the US brands, why not also make all purchases of US branded autos exempt from all sales taxes, as well as throw in a few thousand dollar bonus from the federal government? That way at least consumers rather than bureaucrats would decide whether GM, Ford, or Chrysler most deserved to live on to fight another day?

    Lastly, what is wrong with bankruptcy? I thought bankruptcy laws were created to allow companies to regroup, get their debts under control, and continue operating. Virtually the entire airline industry went through this same cycle and generally emerged stronger. Equity investors know they take extra risk and therefore expect a higher reward, and even lenders know they bear some risk. Let the stockholders and bondholders suffer. Most of the widows and orphans sold their auto stocks long ago. The bankruptcy system is set up to work in favor of employees and customers over financiers, which seems appropriate. Why not let the existing system work?

    It breaks my heart to see the enormous decline of these once proud companies. It breaks my heart even more to see us take money from taxpayers to prop up these companies now. At least a major part of their problems stem from bad management decisions going back as far as the 1950s and accelerating in the 1970s and 1980s. Toyota, Honda, Deere, and Paccar did not make those same mistakes.

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