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GM, Ford Performance Impresses Investors

But Sales Stutter Means Less Revenue From Sale Of GM Shares

The U.S. sales recovery might be stuttering, but Ford and General Motors are drawing plaudits from investors.

According to Moody’s Investors Service, recent actions by Ford, which managed to avoid a government bailout, and GM which is about a year out of bankruptcy, show Detroit’s finest are doing well.

“(recent developments to cut debt) point to the improved operating models of the Detroit car and truck makers, chiefly characterised by lower breakeven levels, the stronger operating leverage and cash-generating capacity of those models, and the recognition that having a strong balance sheet is a must in the cyclical auto industry,” Moody’s said in a report.

Moody’s liked the fact that GM managed to make money in the first quarter when U.S. sales were running at an annual rate of only 10.9 million. Ford had reduced debt, reflecting its ability to generate higher levels of free cash flow in North America. Both were now able to make money at much lower levels of sales.

But GM faces a big test soon, when the U.S government sells its stake in the company on the open market. The US government now has a 61 per cent stake in GM, while Canada owns 11 per cent, with various union trusts owning the balance.

According to Bloomberg Business Week, some analysts think GM is now worth more than Ford – $47 billion compared with Ford’s stock market valuation of $36 billion. This is because GM has a more impressive balance sheet, not least because the U.S. government wrote a lot of the bad stuff off. GM is also stronger in emerging markets, with for instance 13 per cent of China versus Ford’s two per cent, and 20 per cent of Brazil, twice Ford’s market share. GM though is struggling in Europe, with a $506 million loss in the first quarter and no sign of profit until next year at the earliest. Ford Europe earned $107 million in the first quarter. GM’s unfunded pension liability is an awesome $27 billion compared with Ford’s $12 billion though.

Less impressive growth
The U.S. government is expected to sell off one-fifth of its stake, possibly in November.

According to the Financial Times’ Lex column, prospects for GM’s share float have taken a turn for the worse, as the recovery in U.S. sales stalls.

“Growth is about to look less impressive still as the “Cash for Clunkers” car scrapping scheme enters the year-on-year comparison. The programme began in late July 2009 and ended a month later, producing a seasonally-adjusted annualised rate of 11.2 million and 14.1 million vehicles for those two months versus just 9.7 million in June 2009. If last month’s anaemic 11.1 million pace continues, then Detroit will go ex-growth for a least a couple of months. Consumers have been slow to get sales back to the 12.5 million that keeps America’s car fleet constant, much less the 16 million figure typical of the boom,” Lex said.

This may mean when the GM shares become available, they might have to be cheaper than expected a couple of months ago.

“The U.S. Treasury will still be able to flog GM, but buyers, not seeing the turbo-charged model they expected, may demand an appropriate discount,” Lex said.

Neil Winton – July 15, 2010

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