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Strategies & Market Trends : Graham and Doddsville -- Value Investing In The New Era -- Ignore unavailable to you. Want to Upgrade?

To: Investor2 who wrote (117)	3/31/1998 9:39:00 PM
From: porcupine --''''>	Respond to of 1722

<< Thanks for the interesting information on GM. I noticed, however, that the post did not reflect on the possibility that GM products may be perceived to be of less quality or desirability than other car makers. >> Quality and desirability are 2 legs of a tripod, the third of which is price. And, not just purchase price. There is the total ownership cost, where I believe GM is even more competitive. When the 3 are put together, at the end of the day, GM remains the world's largest auto and truck maker, after 30 years of withering domestic and foreign competition. These issues were addressed in some detail in the GADR Update of 1/18/98 (see subsection 8, and what follows, at: web.idirect.com Public List) But, addressing the subject in general terms, there are, as usual, certain tradeoffs in balancing the 3 goals. For example, for a decade or so, GM kept turning out pretty much the same models of Buicks and Oldsmobiles, annually changing only a detail or two here and there. The result was that they were able to "perfect" these models, eventually getting very high quality and reliability. At the same time this held down development costs, making it profitable to sell these high quality models at competitive prices. Part of the problem was the financial embarrassment GM found itself in at the beginning of the decade. Rather than roll the dice by expending a lot of capital on newer models, GM decided to save on development costs, while getting labor and management costs under better control as well. The net financial result is that, comparable accrual earnings notwithstanding, GM has generated vastly more free cash flow in this business cycle than Ford. Chrysler's free cash flow has been minimal, and was actually negative this year. But, speaking to your point, as the years have passed, desirability of GM cars has declined in the face of newer and more interesting styling and features from Ford, Chrysler, and foreign offerings. Now GM has 15 new passenger car models -- at a time when 15 new passenger van and 4-wheel drive vehicles would probably have had a higher desirability quotient. Nevertheless, most of these models are doing well, and GM made a lot more money in North America this year than had been expected. In particular, Cadillac's high quality Catera and high-powered Seville STS, Buick's supercharged Riviera, Oldsmobile's Euro-sleek Aurora and new Intrigue, and the most driver-friendly Corvette ever have increased the desirability of GM's lineup. The quality gap (relative to Ford and Japanese offerings), while it still exists, has been narrowed greatly. In sum, it is not without reason that GM is selling at a discount not only to the Market, but, slightly, to Ford and Chrysler also. But, as Graham noted, there is a price below which any security becomes undervalued (and above which any security becomes overvalued). On balance, considering how much cash earnings GM continues to generate, I think there is far more than $68 of Intrinsic Value in a share of GM. Reynolds Russell web.idirect.com "There are no sure and easy paths to riches in Wall Street or anywhere else." (Benjamin Graham)