GM: The Cash Keeps Pouring In -- 3/29/98 Update
*Graham and Doddsville Revisited* -- "The Intelligent Investor in the
21st Century" (3/29/98)
"The underlying principles of sound investment should not alter from
decade to decade, but the application of these principles must be
adapted to significant changes in the financial mechanisms and
climate." (Benjamin Graham)
General Motors: The Cash Keeps Pouring In
With a Market priced for permanent perfection, General Motors
continues to be priced for imminent disaster.
In the recession of the early 1990's, the survival of even mighty GM
was called into question. All of the big 3 auto makers say they have
reformed and this time will be different. As a reason why investors
should believe that this time they mean it, the auto makers point to
global competition as providing the discipline that will prevent them
from backsliding into their old ways.
Whether or not GM (and other auto makers) will come through the next
recession without the kind of financial bloodbath endured the last
time around remains to be seen. But, it may be a long wait to find
out -- because there is still no sign of recession. Meanwhile, the
cash keeps pouring into GM, and a generous portion of this cash
continues to be passed on to shareholders.
In this business cycle, GM in particular has shown noteworthy resolve
in controlling expenses and increasing shareholder value. But,
economic forecasters have been predicting that recession is 12 to 18
months down the road -- since sometime in 1993.
Hence, year after year GM's stock has traded at a
recession-is-just-around-the-corner p/e of between 7 and 9. This is
Mr. Market's way of saying that he expects earnings will soon
collapse. Yet, year after year GM continues on the same path of
moderate but steady growth as the rest of the U.S. economy.
Since early 1994, GM has earned over $46 per share in cash earnings,
plus extraordinary gains of over a dollar per share, after netting out
all special charges. It has paid $5.50/share of this in dividends,
built up a $18.75 per share cash reserve against the next recession
(or strike), and funded its pension liabilities.
Yet, it's share price remains little changed over this period,
because, as Standard and Poor's has written about GM, "....[there is]
mounting evidence that North American demand is rapidly maturing and
that the peak of the current business cycle is near....[and]
conflicting macroeconomic and industry developments warrant caution."
S&P put those words into print in October of 1995. And, in December
1995, S&P wrote, "[W]e would not add to to positions until it becomes
more certain that a recession will not occur." And, in November 1996,
"[I]t is late in the economic cycle".
In fairness to S&P, 1995 did mark a plateau for GM's earnings. But,
even a year and a half later, we cannot agree that it is "late in the
economic cycle". There is no question that it is not early in the
cycle. And, there is no question that the cycle must some day turn
down. But, there is no economic law that limits the duration of the
cycle.
On the supply side, companies still turn out a profit, inventory as a
percentage of sales has fallen (instead of rising) so far in the
cycle, debt is shrinking as a percentage of corporate assets, and the
value of the dollar is stable or rising at home and abroad. On the
demand side, employment is up, wages are up, consumer spending and
house buying are strong, and household debt as a percentage of
disposable income has plateaued.
So far, there isn't the buildup in supply, slack in demand, or
financial excess that precede a recession -- anywhere on the horizon.
Recently, GM announced another $4 billion in share buybacks, on top of
the $5 billion announced since this time last year. Combined with
about $3 billion in dividends and Raytheon stock now worth over $3.5
billion, since the start of 1997 GM will have distributed about $22 in
cash and stock to shareholders by the end of this year.
1997's (primary) per share earnings were a record $7.89. Total
revenues were a record $178 billion. Operating margins, at 17.8%,
were the highest going back at least 20 years.
GM's market share keeps inching downward in the face of withering
price competition, currency devaluations, and industry overcapacity in
Asia. But, GM had promised to yield market share in exchange for
increased profitability and shareholder value -- the exact opposite of
the strategy that has brought Asia to its current economic impasse.
So far, GM is keeping the promise.
Value Line's most recent update on GM predicts modest, but
respectable, growth in per share earnings to $12.25 (from 1997's
$7.89) sometime between 2001 and 2003 -- without assuming *any*
additional share buybacks.
How much does a $68 stock have to earn to be undervalued?
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Graham and Doddsville Revisited
Editor: Reynolds Russell, Registered Investment Advisor
Web Site Development/Design: ariana <brla@earthlink.net>
Consultants: Axel Gunderson, Wayne Crimi, Bernard F. O'Rourke,
Allen Wolovsky
In addition to editing *GADR*, Reynolds Russell offers investment
advisory services. His goal is to provide total returns in excess of
those produced by the S&P 500.
His investment strategy applies the principles of Value Investing
established by Benjamin Graham to the circumstances of today's economy
and securities markets.
For further information, reply via e-mail to: gadr@nyct.net
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"There are no sure and easy paths to riches in Wall Street
or anywhere else." (Benjamin Graham)
(C) Reynolds Russell 1998. |
