June 24, 2008 11:28AM

Binary Outcome: GM Is Either Going Bankrupt or It’s a Screaming Buy Right Now

By Cody Willard

GM (GM) is either going outright bankrupt or these stocks are screaming buys right now. The biggest problem for this company isn’t their lack of fuel-efficient vehicles or the exhausted consumer… the biggest problem is the same problem the financials have — nobody believes anything on the balance sheet.

GM and Ford finance hundreds of billions of dollars to enable their customers to buy their cars. And we all know that the ratings on any debt from any ratings agency is a sham of a joke and can’t be taken seriously. And so how many write downs on the balance sheet are these guys gonna have to take over the next year? Do they have the capital sufficient to cover those losses?

If they actually disclosed their balance sheet to you, would you consider the company solvent, much less invest-able? And yes, I’m still talking about GM here, though the line of questioning can be applied to any financial institution as I’ve noted often on Happy Hour and on these pages.

The big difference between GM and those investment banks is that GM actually sells a product, a real tangible product. And the good news there is that that product’s market typically works in a pretty obvious cycle. And if the company can just stay solvent on the balance sheet side of the equation, they’re probably going to see sales improve and cash flows return to the operations side of the business. I know — that sounds outrageous! GM, seeing things improve and even profitable…you’re thinking I can’t be serious. But as always, isn’t the time to buy a stock when nobody thinks you can be serious about buying that stock?

There’s blood in the streets of Detroit. I think putting a little bit speculative capital into some GM stock and bonds and/or long-dated calls would probably pay off a bit over the next few years. I’d hedge any long positions with some long-dated puts, and if you play the position sizes and strike prices right, you’d probably end up profiting from the positive gamma in the positions even if GM went to zero.

I’ll explain positive gamma again sometime soon, but if you search the Internet hard enough, you can find lots of posts I’ve written on the topic before. Stay tuned ;).

17 Responses to “Binary Outcome: GM Is Either Going Bankrupt or It’s a Screaming Buy Right Now”

Comment by Tim Jones

June 24th, 2008 at 3:23 pm

As usual GM has missed the boat. Its product mix is totally out of touch with present realties. Where are its fuel efficient cars? Toyota always seems to get it right and is ready to completely dominate the market in hybrid cars. GM bringing out a hybrid SUV again shows its ineptitude. The writing on the wall on fuel prices was here a long time ago.
Comment by Justin

June 24th, 2008 at 7:29 pm

I wouldn’t touch a domestic auto maker with a ten foot pole. Way too much downside for me in the short/medium term. Cody, you are braver than I am if you’re thinking about it. There’s so much easy money to be made out there right now (uranium exploration, junior oil drillers (buy GTE on it’s lows tomorrow, trust me), commodities, shorting financials (yes still), ect, why bother risking capital in a company that has no sense of direction, drive, or future promise of a game changer. They need something. They need to produce single passenger vehicles powered with crotch rocket engines. Now that would be a smash hit in a $140 oil market. 40 mpg to get to work and back home, $10,000 price tag, fast unlike those turd hybrids, and perfect for city driving.
Comment by ashwin

June 24th, 2008 at 8:01 pm

yes!

screaming buy indeed, long the common, calls, and exchange traded debt (http://www.gm.com/corporate/investor_information/fixed-inc-sec/fixed-inc-sec.jsp)

please do not think of ford though, the company is completely mortgaged

if gm cuts it’s dividend, big institutional holders may finally get out and the company can take itself private with the extra cash flow:)

and before you start hating on the cars, please take drive in my dad’s new sierra sle pickup or my cadillac srx. wonderful machines
Comment by Dana

June 25th, 2008 at 1:14 am

GM is a good bet to recover in a big way. They are using the present bad company outlook to restructure their employee situation and streamline the production facilites. GM sells gas miser cars all over the world, just not in the USA. GM has the best R&D in the world with the best hybrid and electric technology. GM will again be a good money maker……..after the present adustment and pain has run it’s course
Comment by Ryan Daniel

June 25th, 2008 at 4:52 am

I don’t think the balance sheet is the issue. Toyota is growing. Honda is growing. Obviously people are getting their cars from somewhere. Just not GM. The issue is quality and has been for 20 years. Japanese auto makers hired Deming. GM tossed Deming out on his ear. Guess who won?

So, the question is will the Volt bring customers back. Maybe. But GM does not live in a vacuum. Customers will come back only if they are not being offered equivalent disruptive technology from Toyota and Honda. The Japanese approach will be the PHEV. GM’s is the series hybrid. But only the all electric driving range will sway the customer. Nothing else matters.

A seismic shift is coming in the auto industry which will repeat the fervor created in the 1920’s. Toyota and Honda have a huge head start. And their technical and quality prowess vastly outguns GM.

This is a gloomy scenario for GM. I wouldn’t buy their stock till earnings start gaining momentum.
Comment by test

June 26th, 2008 at 11:01 am

GM needs to rollout the Volt (electric) and the new Camaro. Watch the profits go thru the roof.
Comment by CB

June 26th, 2008 at 2:48 pm

Hybrid were the last wave. The 2009 wave will be diesels and diesel hybrids. GM has few (Euro Saabs) and no plans to sell them here. Once again, Volkswagen, BMW, and Honda are going take away market share from every GM segment except trucks.
Comment by Gerrett

June 26th, 2008 at 5:24 pm

GM is on the right track with it’s products. They’ve sorted out the quality issues over the last 10 years and the new Chevy Volt is going to completely change the auto industry. I’m with you on a buy, but how much lower will it get before we see some upside?
Comment by Richard Payne

June 27th, 2008 at 12:26 am

You must be kidding! Always putting America last. Chevy has three models of cars that get 30 miles to a gallon and over. The Malibu was the car of the year. Nothing drives so good as a Chevy truck, ask any Dodge or Ford owner. The Tundra was the most recalled truck last year by far how come you dont hear about that. You wont touch an American Car company because you have bought into the “I hate America Crowd”. Go test drive a Chevy and then come back and post.
Comment by Dave Young

June 27th, 2008 at 6:09 pm

Ahem -the problem with GMs wonderful machines is that the people who are and have been buying them are your Dads, your soccer moms ( SUVs), your grandmas ( Buicks ) , and your realtors ( Caddys ). Dads don`t buy many cars in retirement, soccer moms kids grow up, Grandmas leave the Buick in their will to whomever, and Realtors are basically out of work….
so who`s gonna buy GM ? Pickups are going Japanese fast too…
Comment by Jeff Stokes

June 29th, 2008 at 7:06 am

Close or sell off Hummer, Saturn, Pontiac and GMC.

All you need is Chevy, Cadillac, Buick ( for the old farts and the Chinese). Keep Saab for now until you find a good buyer. Move the headquarters out of Detroit and move to Dallas or Chicago. Take it private. Close 50% of the dealers.
Comment by Scott MrArbitrage

July 1st, 2008 at 11:41 am

Somebody - is going to bail them out. Better the private sector than the government, because if the government does the bailing, they’re going to take it out of “big oil” anyway. Big oil might as well OWN it if they’re going to pay for it and pay they will with Democrats in power.

That is a segway to my recent column

“A Big Oil Bailout of the Big Three”

To be sure, speculative fervor with the help of analyst manipulation, a weak dollar and low interest rates have had a major effect on the price of oil. Those are problems that can and should be rectified. Unlike many columns calling for more government intervention, I am laying out a proposal for private sector adaptation that could be profitable to the oil industry, automotive industry and beneficial to the finances of consumers.

My proposition was born as I sat back and asked myself the question “how do you know when oil is over-valued?” The answer came to me as follows: When the gasoline costs more than the average consumer’s vehicle, I think it’s a fairly good sign that something is askew… (continued at tableofwisdom.com)
Comment by Carrie

July 1st, 2008 at 7:17 pm

Thanks for keeping it real, Cody!

I agree with the calls for the Volt and Camaro…. Can’t wait to see how the markets react to them, especially the Volt!

I also agree with the statements about wait just a little more to see how profitable the company will be with the financial restructuring of employees and retirees. One example: in 2010 the Company will no longer be financially responsible for retirees’ healthcare, the Union takes over responsibility then.

Carrie
Comment by steveo

July 3rd, 2008 at 5:38 am

I really think that the democrats can stand back Big time this is there doing president Bush had Big free trade agreements that the democrats swashed And you could see how angry president Bush was when he had sells for GM that was going to bring GM some serious money…
Comment by Brian

July 3rd, 2008 at 9:26 am

I strongly agree with the train of thought in bringing out the Camaro and the Volt right now instead of next year. All the screamers of the foreign car is better is totally misthought and flat out wrong. With the Malibu being car of the year and every model of Impala being a stronger buy over it’s foreign car opposite. G M will bounce back.
Comment by Taylor

July 3rd, 2008 at 3:49 pm

GM makes great cars that are reliable. I’ve driven a Chevy Tahoe for 87,000 miles and it has proven very reliable. I’m thinking about getting a Tahoe hybrid for better milage since I need the size as a work vehicle but don’t want a van type like the Dodge Sprinter since mine is also a personal vehicle. The diesel Sprinter gets slightly better milage but diesel costs more so it’s a wash for me. I hope the younger generation begins to realize that they aren’t going to be able to get a job in Japan or China. There will be a better chance of getting a job if we have viable industry here, so buy American if at all possible. I get really tired of American industry bashing. I like GM and hope they make it!
Comment by simon jester

July 4th, 2008 at 2:42 pm

The Volt’s a dolt. GM couldn’t step up to the plate even when the existence proof of Tesla Motors’ battery-electric Lithium-Ion Roadster is staring them in the face. Short GM; buy Lithium miners. Go SQM!