Friday, 8 May 2009

Company Focus - GM - Stock Pricing: Time for Independent Price Discovery

At long last a financial press commentator has highlighted what appears a schism between GM's stock price and its real-world valuation. The rationally based 'dis-illusionment' that was recognised by the professionals eons ago seems to be filtering through to the public at large. The dynamic GM environment, buffetted by the government, bond-holders and the UAW means that the normative general market consensus for price discovery has been fragmented.

We seem to have reached a time for greater independent price discovery using diverse methods dependent on the inter-acting party; whether Institutional, PE, Hedge Fund or amateur investor.

The FT's Spencer Jakeb highlighted on 07.05.09 that at approx $1.70 the market was effectively valuing the company at over $100bn. [$1.70 x 610,502,000 shares outstanding = $103,785,400]Since that comment, bid offers have dropped to $1.60 at the NYSE close, giving a re-price of $97,680,200; therefore wiping-off $6,105,200.

It is known that much of the GM shareholder-base are 'mom & pop' private investors who have always seen the company as an American economic pillar and bellweather. But more recently it is reported that Hedge Funds and Day-Trade speculators were attracted by the levels of volitility given the present insecure conditions - with short-term 'long' and 'short' plays after the influence of the temporary up-tick rule (to bolster markets) dissipated.

Of course corporate valuations when boiled down, like much in life, depend upon philosophical deconstruction and resultant stance. Thus different parties with different interests from 'strip & flip' to portfolio synergies will be looking at the whole of GM, its divisions (eg GMNA, GME, GM-DAT etc) and the 'cost' of Government intervention and allocate self-perceived reasoned values.

That is a process has even been hard for the now semi-government, semi-UAW and semi-private owned Chrysler, which given the fewer constituent parties - compared to GM's public listing - is theoretically "plainer sailing" to re-organise. Entering Chapter 11 should assist. As investment-auto-motives highlighted on the 'just-auto' blog:

"Whilst the Private Equity houses of Perella-Weinberg, Oppenheimer and Stairway Capital Mgmt are taking the flack for Chrysler being driven to Chapter 11, it should provide a final arbiter that will give greater credence to the debt-holders than they previously mustered from Washington For the US auto-sector to re-strengthen financial markets' confidence (in asset values & balance sheet structures)must be re-built, and be seen to be re-built. Perhaps that is the intrinsic lesson of Chapter 11 and garnering the new from the old at this crucial point in history".

[But even here, under the auspices of Judge Arthur Gonzalez, there is reported feeling that the 'dissident creditors' are not being heard. That could lead to a latterday call to Appeal and a re-hearing which obviously extends the case and the time-span for Chrysler's ressurection].

The greater complexity of GM, both operationally and in its ownership structure (and claims), means that any attempt for a quick fix at governmental level which is possibly legally tenuous would be contested. Thus the GM Chapter 11 turnaround could theoretically take far longer than a protracted Chrysler example.

GM's CFO states, the mere speculation of entering Chapter 11 is presently damaging the industrial giant's sales volume, as already low consumer confidence in its sub-brands is further undermined. (Q109 sales revenue at approx 50% of Q108).

At present the shareprice is down 90% YoY which given circumstances isn't surprising, What is surprising, is the faith that 'maam and pop' still seem to have in 'The General'. That must surely be as a consequence popular consciousness, having been here before decade after decade with latter day business and stock bounce-backs.

Hedge Funds however will have obviously been more prosaic in their determinations and will be assessing the current and potential value of the BRIC+ divisions. At present investment-auto-motives assumes that the Government funding is being (proportionately) applied across GM's worldwide divisions and not just GMNA, therefor producing a nominal drag on each's performance. [This could be the case for SAAB and Adam Opel and the call for Swedish and German government aid]. But in truth that US Aid should be factored only into GMNA since North America is the primary operational dead-weight.

Of course what is ultimately required is an independent marked-to-market audit of GMNA's full asset-base vs its liabilities for fixed-income and equity investors. Only when this is undertaken will conjectural distortion be dissapated and the reality of the scene emerge. It could be only then that the majority of non-professional stock-market participants are finally 'dis-illusioned'.

Even if this is not quickly forthcoming, the calls by the US Government to radically alter equity re-distribution (via debt swaps for itself and the UAW) should be ringing 'equity dillution' alarm bells - press reports hailing that the 'free-float' would be reduced to a truly measly size. If those bells are heard, so the markets will finally shake their government fuelled GM optimism, and a spiralling price decline should emerge.

As its MarketCap falls and the chasm between the level of $ prime-pumping and actual worth widens so GM will have to do something radical.

Some time ago investment-auto-motives prompted that the conglomerate should divest its divisions, maintaining strategic holds but freeing RoW from GMNA. Such an outcome might be the result of a long-winded Chapter 11 process, but even that would pit the Judge's idea of longer-term interest against 'immediate retrievers' seeking short-term liquidity; as we see with Chrysler at present.

As GM stock starts the day at $1.60, investors need to ask themselves exactly how that price is made-up. Is it presently more than the sum of its parts? And if not who is the arbiter to allocate the BRIC+ hopes and calculated asset value? GM itself or a Judge?

As Pontiac (wrongly) awaits its extinction (GTO & 'The Judge' nameplate with it), it is ironic indeed that it may be an external Judge that ultimately assists GM management inspite itself.

But s/he must remember that the investor's interests come first, for without investor confidence the corporation, whether GM [in whatever guise(s)] or any other, has no future.