A short time ago (Nov 17, 2010) we decided to compare the new Government leveraged GM to an investment in Alcoa. A simple comparison over time. A true test of the success or failure of the Government in rescuing the auto industry with billions in taxpayer dollars and then placing that ‘investment’ in the markets.
On Nov. 18th GM had its IPO. Since the reality was that average and even wealthy investors were not in the IPO, the pricing for the challenge was set at $34.90 – the closing price of the opening day. It’s a fair price that reflects the more likely opportunity of the market to get involved in this issue. Alcoa for it’s part closed at $12.94.
On the 17th, we said:
2 months plus into our challenge, and here are some of the financial facts about GM:
Market cap: $56 billion
Forward P/E projection: 8.86
Price to sales: .44
Price to book: 2.51
Profit margin: 1%
Revenue: $131 billion
Gross profit: $-7.6 billion
Diluted EPS: -0.02
Qtrly Earnings Growth: -98.30%
Current Ratio: 1.17
Book Value Per Share: 15.17
The IPO generated over $20 billion dollars for brokerages and GM. The average taxpayer recieved… nothing. GM still owes the Government over $30 billion.
At a glance the numbers look fine. Healthy in fact. Except the EPS shows a loss. Earnings growth is non-existent. The gross profit is negative. The price to book is fully valued for a mature company in a very mature industry.
This is not a company surging to success. This is not a stock that will dazzle investors and provide strong rewards. This is a stock that indicates a problem down the road. Because the profit margin is too small, gross profit is negative, and earning growth in the red. Something isn’t right at GM, but it isn’t obvious what that is, yet.
We have stated before that the auto bailout was a farce. A move to expand the power of the Government. Looking at GM now, it seems more likely that the company was placed back on the market for show rather than because the intrinsic problems at the company (like the low profit margins) have ever been fixed.
If you compared GM to Alcoa right now you would see that Alcoa has a Price/Book of 1.22, with a Book Value Per Share of $13.34. The Current Ratio is 1.31 and Gross Profit of $1.54 billion. Fully diluted EPS is 0.24 and Forward P/E is 11.29. For a mature company in a very stable and mature industry, it is somewhat undervalued by most standards and estimates. Which explains that currently the institutions have a target of $19.55 on the stock.
But if you were to assign the same Price to Book valuation on AA that GM has as an example, it would be trading at $33.48, which is silly. Alcoa just isn’t worth it right now. And that is without massive Government regulations and intervention, huge union pension commitments, and competition from overseas that can offer the same product for less. Of course it is also without the political need for the GM stock to reach the break-even point ($48.58) justifying the initial auto bailout.
Given is the fact that AA and GM are 2 very different companies, in very different industries. Still we believe that the comparison is not absurd. We stand by our original belief that Alcoa will be the better investment. We stand by the thought that GM is an investment waiting to punish investors.
With 4 months to go: Alcoa is $16.12 and GM is $37.41. That’s a gain of $3.18 (25%) for Alcoa and $2.51 (7%) for GM in the past 2 months. ** and for the sake of simplicity we have not included the dividend of Alcoa in the calculations.**
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