Deep Value in GM

04/08/2005 12:00 am EST


Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

"With the recent decline in stocks, we are starting to uncover a number of undervalued equities," says Gordon Pape, editor of Internet Wealth Builder. Here, along with Irwin Michael, he discusses a stock that meets their "deep-value" discipline - General Motors.

"Currently, our strategy is ‘short-term pain for long-term gain’. While we might be somewhat early, it is our opinion that one should be proactive. In a nutshell, our view is that in the context of the next 12-18 months we expect well-researched stock selections to be considerably higher in value than what they are today.

"With that, we would suggest that investors look at General Motors (GM NYSE). The company recently revised its first-quarter and calendar-year earnings guidance to reflect lower North American sales and production volumes, a tougher pricing environment, and a more car-based sales mix. GM said it now expects to report a loss of approximately $1.50 per share in the first quarter compared to a previous target of breakeven or better. For the calendar year, GM said it expects to report earnings of approximately $1 to $2 per share.

"Given that GM is one of the 30 stocks that make up the closely-followed Dow industrial average, it tends to get more than its fair share of media attention – particularly when the news is bad. While we agree that GM is facing its share of problems at the moment, we think its low share price justifies our commitment to the stock. In fact, we feel that with the stock now below $30, GM shares are trading below its ‘sum of the parts’ value.

"Unlike GM’s auto business, General Motors Acceptance Corp. (GMAC), continues to perform very well. In 2004, GMAC had net income of over $2.9 billion and contributed most of GM’s consolidated earnings. We feel that, on a stand-alone basis, GMAC could be worth close to $15 billion or $28 per GM share. Looking at it another way, at today’s current price, we think investors who purchase GM’s stock are essentially paying for GMAC and getting the automotive business for virtually nothing.

"In the past, many investors have been drawn to GM because of its dividend. The shares currently pay an annual dividend of $2, which at today’s price represents a yield of almost 7%. However, with GM recently cutting its earnings guidance to a range that is below its dividend, some fear the company may be forced to cut or even eliminate the dividend entirely. We caution that GM’s dividend should not be viewed as a sure bet, and our investment thesis with regards to GM is not dividend-driven.

"The primary reason we own GM is that the stock trades below its book value of $40.10 and what we believe to be its net asset value and break-up value. On a final note, we were pleased to read that on March 21 GM’s CEO, Rick Wagoner, personally purchased 50,000 shares for his own investment account. In a related statement, Mr. Wagoner explained that the investment demonstrates his confidence in the long-term prospects of General Motors."

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