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General Motors' big scam
GM tried to mask its billion-dollar third-quarter loss with bright news about cuts in health-care costs and some vague pronouncements about more savings. I don't buy it.
By Robert Walberg
Rick Wagoner might not be the best CEO in the country, but he would make an expert tosser in three-card monte. For those unfamiliar with the game, three-card monte is a sleight-of-hand game where willing participants are scammed out of their money by the dealer, or tosser.
Well, Mr. Wagoner just scammed the investment community when he announced General Motors' (GM, news, msgs) huge third-quarter loss of $1.1 billion, or $1.92 per share. The Street expected a loss of only 87 cents per share.
Normally, a miss of this magnitude would tank the stock. Knowing, though, that it was about to report more bad news, the company pursued a course of distraction. At the same time it announced staggering losses, management trumpeted a slew of restructuring moves -- the biggest being a deal with the United Auto Workers union to cut health-care costs by nearly $3 billion a year.
GM also announced another $2 billion in structural cost cuts -- though its important to note that details of how the company hoped to achieve those cuts were virtually nonexistent. In sum, General Motors hopes to save nearly $5 billion (or $5 per share) by the end of calendar year 2006.
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Management also announced that it is considering selling a majority stake in its profitable GMAC financing unit. Based on Street estimates, selling a 51% stake would raise nearly $11 billion. That would go a long way toward shoring up the companys finances, though it would take away a major source of the automakers earnings.
Market share: Now you see it
As management hoped, the Street ignored the large operating losses and focused on the restructuring. GM stock soared 7.5% Monday, closing back above $30 per share. Additional gains are likely over the near-term as traders cover short positions and Wall Street analysts up their ratings.
Better days might indeed be in the offing. Its tough to imagine things getting much worse. But investing on the hope of improvement is never a great, or profitable, idea. Despite its efforts to lower its structural costs, the critical problem facing GM over the long term is the downward trend in market share.
The $1.1 billion quarterly loss was not the only number management wanted to sweep under the rug. Two more numbers it wasnt very proud of were 14.6% and 25.6%. Those were its global and North American market-share numbers, and they were down 0.8% and 2.9% from the same period last year. Even more than the quarter's huge loss, these are the numbers that should frighten investors.
GM can streamline its operations all it wants. But if it cant streamline the design of its cars, improve sales and grow its market share, all the restructurings will be for naught. What really ails GM is not the high costs of operations but an unfocused, unattractive and uninspiring assortment of cars that leaves a growing number of consumers uninterested.
Dont get me wrong. Monday's cost-cutting announcements improve the companys chances of returning to profitability sooner rather than later. It was especially encouraging to see management and labor working together amicably to reach an agreement on reducing health-care costs. Thats a big change from the past, and shows that both sides recognize they need one another to survive.
At some time, GM management needs to focus on the larger picture, and thats how to recapture market share from foreign competitors. The company bet on big trucks and SUVs to return it to glory at a time when oil prices were just about to shoot higher -- a big mistake that many of its foreign competitors did not make. Now it must backtrack, downsize and retool to meet the growing demand for sleeker, more fuel-efficient vehicles.
No real fix in sight
For the better part of two decades, the company has been chasing rather than leading the market. That failure rests squarely with management. Unfortunately, the current team doesnt seem any better equipped to deal with the companys long-term problems than its predecessors. It spends too much time pointing fingers and making excuses and not enough time innovating and inspiring.
With the health-care crisis abated (at least temporarily), the financial exposure to Delphis bankruptcy factored in and cost-cutting plans put forth, management should have no more major distractions. Its time now to deliver on a new line of automobiles that win the heart and minds of consumers worldwide.
GMs stock might go up another 10% or more on the hope that tomorrow will be better than today. But this is one investor who wont bite. Until management proves that it knows how to do something other than cut costs, GMs future isnt likely to improve. It might not lose $1.6 billion next quarter or the quarter after that, but make no mistake about it: GM is a broken company with no real signs of getting healthy.
Show me sustained market share gains and Ill jump back on board. Until then, I have no more interest in playing the stock than I do in playing a game of three-card monte.
At the time of publication, Robert Walberg did not own or control shares of companies mentioned in this column.
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