From Fox Business:
“Tesla Motors, maker of luxury-all-electric cars, is reportedly planning a stock offering. If the sale occurs, Tesla would be the first U.S. car company to issue shares since Ford Motor Co. in 1956.”
This is very exciting news. Not necessarily from an investment standpoint (it will likely be a while before pure electric car companies can prove to investors they have a sustainably profitable business model), but from an innovation point of view. The United States needs to promote the future of a “green” economy, not just to reduce oil imports, but even more importantly to generate a new force that can produce job growth, much like the advent of the Internet has already done. I hope Tesla has a successful IPO, as it may provide a psychological boost for other entrepreneurs out there who would like to get the “green” ball rolling.
I came across this article by John Battelle over on Business Insider and thought I would share it with everyone. I am a loyal Southwest customer so I have managed to avoid the crazy complicated (and irrational) dynamic pricing algorithms that many of the major carriers use. Hopefully there are not too many United shareholders out there reading this…
Thanks For Flying United. Please Give Us All Your Money
This seems like the kind of thing that could get more people into GM showrooms and help them recapture lost market share, even if most consumers do not purchase the new Chevy Volt, due out in late 2010.
According to an Associated Press story today GM announced that the Chevy Volt rechargeable electric car should get 230 miles per gallon in city driving, more than four times the mileage of the current mileage leader, the Toyota Prius.
From the story:
“The Volt is powered by an electric motor and a battery pack with a 40-mile range. After that, a small internal combustion engine kicks in to generate electricity for a total range of 300 miles. The battery pack can be recharged from a standard home outlet.”
Despite a hefty initial price tag (expectations are ~$40,000), the car could still be cost effective. Why? According to the story, “If a person drives the Volt less than 40 miles, in theory they could go without using gasoline.”
If we want to reduce our use of foreign oil in a meaningful way, this is exactly the kind of innovation that could do it. Not only will less of our money go to the Middle East region, but we will be reducing pollution and Americans will be able to keep more money in their pockets by saving on the cost of gas. Count me as very much looking forward to the launch of more electric cars in the United States.
It is hard to argue with the success of the “Cash for Clunkers” automobile incentive program so far. With $1 billion already blown through, Congress is working on a $2 billion extension, despite most Republicans being against the program (probably because it was a Democratic idea, not because it is not working).
So far the average consumer is trading in their clunker for a new car that gets 9 miles per gallon more than the vehicle it replaced. The sales spike during the last week of July has led both Chrysler and Ford to report July sales gains, the first increase in 2 years for the domestic automobile industry. General Motors reported a 19% decline in sales, but still saw an enormous benefit from the program.
It remains to be seen if car sales will be sustained at higher levels, but the glass looks half full at this point. New car inventories are near all-time lows so inventory rebuilding in coming months should boost GDP pretty significantly, perhaps leading to a positive GDP print for the third quarter.
The car companies are not the only beneficiaries, however. “Cash for Clunkers” helps consumers and the country as a whole too. Higher fuel efficiency should not be understated. Consumers will save money by spending less to fill up their gas tanks, freeing up money for other things. In addition, less pollution from the new vehicles not only is safer for Americans but the environment in general as well.
Despite skepticism from many, this program does this show that smart government spending can stimulate the economy. In this case it does so in more ways than one, making the investment well worth the several billion dollars spent.
Full Disclosure: No positions in Ford or GM at the time of writing, but positions may change at any time
Typically when I write about individual stocks on this blog I share bullish ideas that I am either long or thinking about going long. I was recently doing some work on AutoNation (AN), however, and since the stock looks pricey to me I figured I would share a bearish case as well.
The reason for a contrarian like me to look under the hood of AutoNation is pretty straightforward. The U.S. automobile industry is obviously struggling right now but AN has strong management and the dealers are in better shape than the car markers themselves (cost structures are more in-line without union obligations, etc). Couple that with strong buy side interest from Eddie Lampert’s ESL Investments and Bill Gates affiliated Cascade Investments and my interest was peaked.
That said, it appears that I missed the boat on AutoNation, at least for now. The stock has soared 350% from under $4 per share to near $18, just below a 52-week high. The stock’s P/E of around 20x is high, but part of that is due to cyclically poor earnings during the current recession.
I looked back at AutoNation’s financial statements for 2006-2007 and found that earnings per share peaked at around $1.45 during the boom years. Even at that level of profitability, AN stock trades at 12 times earnings, hardly a bargain for a slow growing automobile retailer.
AutoNation has a strong share buyback program in place, which is attractive to me, and the auto retail business should slowly improve in coming years, so AN is on my radar screen. However, given the current price and the move the stock has already made (ESL and Cascade timed their buys very well), I am not a buyer here. If we got down to the low teens, perhaps I would take another look.
Full Disclosure: No position in AutoNation at the time of writing, but positions may change at any time
I kid, of course. The market is up 200 points today, not because GM is filing bankruptcy, but rather because investors seem to understand that the event itself is not at all catastrophic. After all, Chrysler is emerging from bankruptcy shortly and actually saw sales go up after they filed. It seems that most people, investors and car buyers alike, understand that Chapter 11 is a legal corporate process first and foremost and should be an afterthought to car buyers. Still, who would have thought the market would react quite so well initially?
Two short points on GM. First, the stock is up 20% today to about 90 cents. It’s worthless, folks. Those who still grip their “efficient markets hypothesis” tightly can use this as a perfect case study against the theory.
Second, how will we be able to judge whether “New GM” is viable long term after they emerge from bankruptcy (which many say will be before summer ends)? It’s all about cost structure. Many attribute their latest woes chiefly to the weak economy and lack of credit, but they seem to have forgotten that GM was a money loser in 2006 and 2007, when credit was flowing more freely than any other time in our history.
Consider the chart below, which shows how far from profits GM has been over the last three years:
As you can see, GM needed a near-10% mark-up over cost to breakeven on their vehicles. They never hit that goal in 2006-2007, even before they started selling cars for less than they built them for in 2008. If “New GM” can get their costs down, and have them be predictable and stay low, the company might be able to make a comeback down the road. It won’t be easy, but Chapter 11 was the only way to make it even a reasonable possibility.
Full Disclosure: No position in GM, past or present.
General Motors (GM) is working with bond holders to try and avert a bankruptcy filing. There are reports this morning that an agreement on a proposed debt for equity swap may have been reached. For current GM shareholders the question is pretty simple, should you sell at the current price of $1.35 per share?
Well, if GM files chapter 11 shareholders will very likely be wiped out completely (there have been a few cases when they aren’t, but it’s very unlikely). But what if the bond holders agree to certain terms and the company avoids bankruptcy? Isn’t that possibility the sole reason GM shares trade at more than $1 right now, even though the company is effectively bankrupt?
The short answer is yes, but consider another fact. In the latest proposal made to bond holders, current GM equity holders would retain 1% of the newly restructured company’s stock. In order to make the case to hold onto GM stock today, one has to argue that General Motors equity, after the restructuring, will be worth at least $80 billion (100 times the current $800 million market capitalization). How would one even begin to make that case?
There appears to be debate on this question, which is puzzling to me. I think many people are mistakenly under the assumption that “small, fuel efficient” cars equate to miniature so called “smart” cars that we see every so often on the road and in Europe, as opposed to simply something other than a gas guzzling SUV or crossover vehicle. In fact, most sedans today are very fuel efficient.
Will U.S. consumers buy these cars? Well, that question has actually already been answered. As you can see from the chart below, the top 5 best selling cars in the U.S. get more than 30 miles per gallon on the highway, and #6 on the list isn’t too far behind:
For those who don’t know, YRC Worldwide (YRCW) is the former Yellow Roadway. Here is some of what the Wall Street Journal is reporting:
“YRC Worldwide Inc., one of the nation’s largest trucking companies, will seek $1 billion in federal bailout money to help relieve pension obligations, the chief executive said Thursday. Chief Executive William Zollars said the company will seek the money to help cover the cost of its estimated $2 billion pension obligation over the next four years. Under a complicated system that Mr. Zollars labeled unfair, roughly half of YRC’s contributions to a multi-employer union pension fund cover the costs of retirees who never worked for the Overland Park, Kan., company.”
Awfully presumptuous of him, don’t you think, applying as a trucking company without any indication Treasury would ever widen TARP to include any U.S. corporation? I would be shocked if this were approved, and if somehow it is, TARP would be completely out of control.
“Mr. Zollars declined to comment on YRC’s specific strategy in seeking the funds, other than to say the company shouldn’t be forced to pay the pension benefits of employees who never worked for YRC.”
This seems like an odd explanation. I don’t know the details of the “complicated, multi-union” pension plan in question, but it strikes me as probable that if half of YRC’s contribution goes to people who didn’t work for YRC, then the other truckling companies are in the same boat and are paying for some of YRC’s former employees. Does Zollars want to stop paying for non-YRC pensions while still having his competitors subsidize YRC’s pension obligations? The whole thing is bizarre, to say the least.
Full Disclosure: No position in YRCW at the time of writing, but positions may change at any time
Call me skeptical that since the Obama administration’s auto task force ousted General Motors CEO Rick Wagoner it means the government is going to take over and ruin the auto industry. I think Wagoner’s list of accomplishments (or lack thereof) shows that he deserved to be gone long ago. After all, GM stock went from $60 to $2 under his tenure as CEO.
As for whether the government should have the right to force him out, why shouldn’t they have the same power that any other creditor or investor would have when trying to help a company avoid bankruptcy? Private equity invests in distressed companies all the time and as a condition of such investments always has a say in the turnaround plan, including replacing a chief executive. Having such power is the only way they feel comfortable that adequate changes will be made to somewhat protect their investment.
The government is unfortunately in the drivers seat in this case because nobody else will come to GM’s aid in its current form. By doing so, however, they should have the same rights as anybody else. No more, no less. Whether they should have even tried to prevent a GM bankruptcy is another question entirely, and a very valid one at that. I have no problem with someone arguing against that, but that really has nothing to do with the Wagoner situation.
The Obama team has decided to continue the public aid that the Bush team started, probably to try and avoid further destabilizing the financial system and economy. Reasonable minds can (and are) disagree over whether that is the right thing to do or not, but Rick Wagoner had to go regardless. Don’t forget, under his leadership, even when the economy was booming GM North America was in the red.
What about Wagoner’s replacement, Fritz Henderson? Well, I don’t think the government had a hand in choosing him. He openly and proudly announced that he was a lifelong GM’er and that Rick Wagoner was his mentor. Yikes, I guess the jury is still out on whether that is change we should believe in or not.
Full Disclosure: No position in GM at the time of writing, but positions may change at any time (I don’t expect this to change in this case)