GM Needs to Double Earnings to Repay Taxpayers

General Motors’ much anticipated initial public offering filing finally landed on Wednesday. But investors shouldn’t get too caught up in the hype. Sure, the automaker looks in pretty decent shape thanks to last year’s bankruptcy clean-up, and car sales are motoring away from last year’s lows. But to repay U.S. taxpayers in full, GM needs to at least double its earnings.

That’s assuming the carmaker is valued at the same earnings multiple as Ford Motor. Granted, GM and its bankers could argue that it has advantages over its cross-town rival that may warrant a higher valuation. It has far less debt, for starters. And it has a stronger position in fast-growing China.

But operationally GM is still lagging: the pre-tax margin on its global autos business was 5.7 percent in the second quarter. After years of losses and in a fairly low-margin industry, that’s worth shouting about. But it falls shy of Ford’s 7.2 percent margin in the same period. There’s an even bigger gap of more than three percentage points between the margins the two manufacturers make in the key North American market.

Being generous to GM, assume the company should trade on the same price-to-earnings multiple as Ford — 6.4 times next year’s consensus earnings estimates, according to Reuters. The U.S. Treasury converted $43 billion of emergency loans into a 61 percent equity stake in the revamped GM that emerged from Chapter 11. That means the Motown manufacturer has to be worth about $70 billion for Uncle Sam to break even.

On Ford’s PE multiple, GM needs to earn just shy of $11 billion next year to hit the desired target. Extrapolating earnings in the second quarter, GM would make as much as $5 billion this year...

“low-margin industry”.... yeah made so low by the Unions... I once saw the figures on how much of the cost of each vehicle produced in a UAW plant is directly associated with UAM demands and benefits.

Why is it that the Japanese (and Koreans now) build plants generally in “right to work states”? Simple - they are not forced to recognize the unions.

My Nissan Titan (built in Mississippi by non UAW workers) has been a better vehicle than my last new vehicle (a GM product). While it has had a couple of recalls - they have not been major issues, and were not safety-related. The initial quality off the dealer’s lot is better, I haven’t had the odd quirks of the GM I had either.

By the way - my Titan is a 2009. The vehicle it replaced was a 2008 Chevrolet Impala. It had all sorts of quirks - though a fairly nice vehicle. It just had so many little issues - that the GM dealerships didn’t want to recognize (even when they could be demonstrated in their presence). Noises, water leaks on window/door gaskets, funny shifting transmission, delivered with a warped power steering pulley, paint that didn’t want to stick, etc.

My first Dodge truck was a 2000 model - it was made in a UAW plant. It was a pretty good truck (though it had some issues - most notably, a transmission sensor that after 3 visits resulted in a brand new transmission), a leaky water pump housing, and some various paint issues itself.

Bought a 2002 Ram (same model/trim level) but made in the plant in Mexico - not UAW, I don’t believe... was actually a better made truck, particularly in fit-and-finish. And this was the first year model of a brand new body and interior, plus the first year of the 4.7L V8. That truck was great, and I still miss it. I had no issues at all with it, and kick myself in the tail every time I think about it. The vehicle that followed that was a 2004 Chevrolet Tahoe - liked the look and room. Got fair gas mileage... had issues - especially with Delphi-produced electronics (entire gauge cluster had to be replaced...).

Wife had a 2002 Oldsmobile Intrigue - and thank GOD for the extended warranty we purchased. A/C went out at 60K miles. Transmission grenaded at 76K miles, insanely complicated emissions equipment (electric pumps that push fresh air into the exhaust just before the cats - at over $1K each - that were engineered with an opening that scooped water any time it rained hard... thus failed regularly...

The list could go on...

Get rid of the union - and make wages and benefits more in-line with the real world, and GM could be profitable and out of debt to taxpayers in short order. But that won’t happen...

“assume the company should trade on the same price-to-earnings multiple as Ford — 6.4 times next year’s consensus earnings estimates”

Ahahahahaha.

Funniest thing I’ve heard of in a long time.

Ahahahahahaha.

Yeah, their revenue is what, 5 billion this year? They’ll then be worth about 2x what Ford is, not 6.5x.

I could see an argument for valuing them at par with Ford.

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