Divi-Vest owns about 147,000 shares.
Ron Harbour, partner in charge of auto manufacturing at consultant Oliver Wyman, calls the company's quality improvement over the past five years or so "the most significant in history....There's no more quality gap to competitors."
In part this improvement owes to the huge styling gains the company has made under its vice chairman, Robert Lutz, and chief of design, Ed Wellburn. Rather than assign a new vehicle to one studio, GM now has several teams around the world come up with competing designs. Ironically, this has speeded up the design process, Wellburn tells Barron's, giving the engineers more time to focus on quality.
"Enormous" is the word that Csaba Csere, editor-in-chief of Car and Driver magazine, uses to describe GM's progress. "Their cars look good on the outside, have a luxurious sense inside and drive well," says Csere, whose publication used to routinely blast the General's vehicles. "Look at the new Malibu. It's selling well and for a much higher transaction price than the previous edition," he says, adding that GM's improving products will "absolutely" make a difference against competitors.
The Malibu's sharply rising sales -- 59,123 were sold in 2008's first four months, 22.5% above the total a year earlier -- are helping to shift GM's mix toward cars. In April, cars accounted for 47% of sales, versus 39% a year earlier, as SUV sales fell 17%, to 608,000 units, while auto sales dropped just 4%, to 450,000. At this week's annual meeting, Wagoner probably will announce that the company is accelerating that shift by curbing production of slow-selling trucks and boosting car output.
At the same time, GM seems to have realized that even a relatively modest engineering investment can pay off nicely. It spent 18 months modifying the base engine of the manual-transmission Chevrolet Cobalt, so that it now gets a class-best 25 miles per gallon in the city and 36 on the highway -- up from 24/33 previously, without any loss of horsepower. That should help sales of that compact car.
Right now, the shift in mix -- which GM President Fritz Henderson says sped up in May -- hurts because cars produce lower profits than sport-utility vehicles. Long-term, however, capitalizing on the shift is crucial for the company to survive, attract new customers and meet tougher fuel-economy and emission standards, particularly if oil prices really do soar toward $200 a barrel.
As for market share, Tom Libby, senior director of industry analysis at J.D. Power and Associates, expects GM to boost its domestic figure in 2010 to about 23% from around 22% now. (At its peak four decades ago, GM had almost 50%.) Better vehicles, like the coming Chevy Traverse crossover (a mechanical cousin of the elegant, popular Buick Enclave) are making GM more competitive, he says, at a time when there are virtually no new segments of the U.S. market for Asian manufacturers to enter. His controversial prediction: "The Asians have made all the gains they are going to make."
GM is growing strongly outside the U.S., where it now sells more vehicles than it does at home. Last year, its worldwide sales rose 3.1%, to 9,370,000, giving it 13.3% of the global car market.
David Kudla, the chief investment strategist of Mainstay Capital Management, which oversees some 401(k) accounts for GM employees, says that the Detroit giant's "real opportunity is abroad and particularly in emerging markets....It's truly phenomenal." In the first quarter, he notes, 64% of the company's unit sales came from outside the U.S., and pretax profits in Latin America, Africa and the Middle East doubled to $517 million. China and Brazil are now, respectively, General Motors' second- and third-biggest markets.
Henderson says that unit volume outside the U.S. will be "consistent" with the good showing seen in the first quarter.
Sean McAlinden, the economist from the Center for Automotive Research, says that GM "has finally gotten the message" about employing its global scale and using common vehicle platforms around the world. Its "potential for growth (in the rest of the world) is better than Microsoft's," he quips, referring to the hundreds of millions of potential buyers in emerging lands.
TO KEEP GROWING ABROAD, GM must weather its domestic problems. In the first quarter, it burned through $3.4 billion of its cash reserves -- $2.1 billion of which it attributes to the American Axle strike -- to end with $23.9 billion, down from $27.3 billion on Dec. 31. GM also has $7 billion in undrawn lines of credit, giving it about $31 billion in liquidity. Two or three similar quarters would bring back bankruptcy worries. It's crucial that GM keep its cash pile above $18 billion or so, at least until mid-2009, when the coming labor cost cuts will become more visible to the market.
Barron's Online Editor Rich Rescigno says GM's battered stock is finally worth investors' attention. (May 30)
Admittedly, analysts have a hard time projecting GM's cash levels at the end of 2008 because of all the uncertainties, but the company is likely to finish the year with at least $20 billion.
John Casesa of Casesa Shapiro Group, an industry advisory firm, says that GM's liquidity appears adequate for the next two years or so. But he warns that if 2008 industry sales are as weak as indicated by April's figures, the shift to cars from SUVs accelerates and GM's results don't soon improve, the company might be forced to raise more capital.
GM could raise more cash through the equity or credit markets. With the credit crunch having eased a bit, a bond convertible to equity is doable, Casesa says. But selling stock would dilute existing shareholders' interests, and peddling bonds would add to the company's $110 billion long-term debt burden (including $47 billion that will be eliminated after the health-care trust is formed). General Motors could also close more plants, eliminate some slow-selling models, sell assets and cut its $1-a-share dividend, which costs it $566 million annually. (Some analysts expect this to happen soon.)
AS FOR GMAC, though it lost $589 million in the first quarter thanks to ResCap's woes, it still earned $258 million on auto financing and has about $19 billion in liquidity. ResCap is in serious trouble, but won't hurt GM's auto results. Says Shelly Lombard, a credit analyst with Gimme Credit: "If ResCap goes away today or tomorrow, it doesn't have any effect on GM besides forgone profits and the loss of GMAC value. GM isn't going down with ResCap."
Nonetheless, for every potential positive for General Motors, there's a potential negative. That's what makes the stock so risky. Anyone contemplating betting on it should realize that results may get worse before they get better next year. Soon-to-be released May U.S. auto sales numbers will be ugly, and might push the stock below the current 17 and change, providing an attractive buying point.
But picking an exact turning point in the economy or a stock is a rube's game. The short-term factors are out of GM's control, but 12 months from now, the economy should be past the hump. More important, "looking three to five years down the line," argues Casesa, "the factors GM can control -- labor costs, global scale and brands, and improved products -- will win out."
So while GM's 100th birthday party might not be particularly festive, its 102nd could be quite a bash.
