BREAKINGVIEWS - Investors in Motown see nothing but recession
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Antony Currie
NEW YORK (Reuters Breakingviews) - Investors in Motown have been struck by a single-minded obsession: fear of recession. Considering the economy's wobbles, they're right to be cautious about automakers. But shareholders have wiped a combined near $50 billion off the value of Ford and General Motors since January's highs. That's more than either company is currently worth. Yet both look pretty solid, with GM's $2.5 billion consensus-beating second-quarter earnings its best showing in years. The reaction looks overdone.
For starters, both have been posting impressive results even as U.S. industry sales languish around 12 million a year: GM's operating margin before taxes and interest payments was almost 10 percent in the three months to June, for example. And both have substantially reduced their debt loads since the credit crisis -- GM through bankruptcy, Ford by savvy restructuring. That gives them much more leeway to stay profitable should economic concerns persuade consumers to shy away from the showrooms.
But that's not all. Both are generating piles of the green stuff. GM now has almost $30 billion of net cash, or 70 percent of the manufacturer's current market capitalization. Add to that the value of its tax breaks from earlier losses, and GM's current market capitalization appears to be giving no credit for the core automotive business.
Of course, it's not all good news. GM still has $20 billion of unfunded retiree commitments on its books. The company revved up earnings by as much as a quarter, according to Morgan Stanley, by parking 122 days' supply of trucks with its dealers -- almost three times the average auto supply. And hanging over the stock is continuing concern about when the Treasury will sell its remaining one-third stake.
Ford deserves some healthy scepticism too, considering its pre-tax margins, while decent, slipped last quarter. It also has $14 billon of debt on its books. Moreover, the earthquake and strong yen have temporarily hamstrung Japanese rivals, allowing GM especially to cut incentives. Toyota and others are sure to come back fighting once they recover. GM and Ford have their challenges. But these have been adequately reflected in the market trouncing they've received. A market bottom feels close.
(Editing by Rob Cox and Martin Langfield)
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