Ramsey,
My play on GM is this.
I am going to resist on GM until the strike is settled. While I think that the strike will be settled on GM's terms (because they can afford the strike more than the UAW and its members), I would like to see what the terms are and what the local analysts are saying. (I would follow the strike at www.detnews.com (Detroit News) or www.freep.com (Free Press) for up to the moment news.
I think that the strike is very positive for GM if they can translate it into cost reductions. IMO, the emphasis should be on profitability rather than top line growth.
My gut reaction would be to buy calls after the strike. I think that there will be a lot of pressure on the GM board to spin-off several of the subsidiaries, particularly Hughes Electronics and Delco, to create some shareholder value. Some analysts believe that the subs are worth more than the $68 stock price. If so, you would be getting the auto manufacturing as a throw-in.
I have not done enough due diligence at this point, One thing that I would recommend is that you look at the cash balances on the balance sheet. At the beginning of the fiscal year, Ford, for example, had $20 per share of cash on its balance sheet. GM had a war chest but that will be affected by the strike. That is not uncommon among the automakers.
Currently, I am invested in Ford calls. I have no position in GM and have no interest in Chrysler as I think that it may be overvalued. Ford is definitely the leader of the three and I would not hesitate purchasing more with a target PE of 12-13.
What I do not understand is the willingness of American families to commit so much of their disposable income to automobile purchases. However, that is coming from a person who owns three vehicles with book values of under $1,000.
JL |
