from Breakingviews:
GM needs to double earnings to repay taxpayers
General Motors' much anticipated initial public offering filing finally landed on Wednesday. But investors shouldn't get too caught up in the hype. Sure, the automaker looks in pretty decent shape thanks to last year's bankruptcy clean-up, and car sales are motoring away from last year's lows. But to repay U.S. taxpayers in full, GM needs to at least double its earnings.
That's assuming the carmaker is valued at the same earnings multiple as Ford Motor. Granted, GM and its bankers could argue that it has advantages over its cross-town rival that may warrant a higher valuation. It has far less debt, for starters. And it has a stronger position in fast-growing China.
But operationally GM is still lagging: the pre-tax margin on its global autos business was 5.7 percent in the second quarter. After years of losses and in a fairly low-margin industry, that's worth shouting about. But it falls shy of Ford's 7.2 percent margin in the same period. There's an even bigger gap of more than three percentage points between the margins the two manufacturers make in the key North American market.
Being generous to GM, assume the company should trade on the same price-to-earnings multiple as Ford -- 6.4 times next year's consensus earnings estimates, according to Reuters. The U.S. Treasury converted $43 billion of emergency loans into a 61 percent equity stake in the revamped GM that emerged from Chapter 11. That means the Motown manufacturer has to be worth about $70 billion for Uncle Sam to break even.
On Ford's PE multiple, GM needs to earn just shy of $11 billion next year to hit the desired target. Extrapolating earnings in the second quarter, GM would make as much as $5 billion this year. But thanks in part to higher commodity prices and other costs expected in the second half of the year, that figure is probably flattering.
If car sales continue to improve GM reckons it can increase production without pushing costs up too much, meaning the bottom line should get a significant boost next year. But it would require a heroic combination of bumper sales and stringent cost control to more than double profit. Until the new GM can prove it's caught -- if not overtaken -- Ford, it doesn't merit a valuation that will make taxpayers whole.
CONTEXT NEWS
Citi selling its jewels
Occidental Petroleum is buying Citi’s commodities trading unit Phibro for roughly its net asset value. How much that is, exactly, is hard to tell. Occidental said its net investment in Phibro is expected to be about $250 million.
The bigger figure, of course, is the $100 million associated with star trader Andrew Hall. His pay package has been the subject of much hand-wringing at Citi and in Washington.
Phibro’s management team, headed by Hall, and its employees will remain with the unit after the sale, expected to close by year-end. Citigroup shares were fractionally lower in morning trading on the New York Stock Exchange, while Occidental shares were up about 1 percent.
The problem, as many pundits are pointing out, is that Phibro is a profitable business, and Citi needs funds to repay a $45 billion government bailout. Like so many asset sales put together by institutions on the government drip — AIG in particular — the golden eggs tend to sell better than the rotten ones.
In this day and age of the corporate bail out, you cannot justify one dude making $100mm The real idiocracy is allowing companies to be too big to fail. Nuf said.
Road to fortune or highway to hell?
That will ultimately be the question asked about what kind of a future the German carmaker Opel faces.
Parent General Motors said on Thursday that it indeed wanted to sell a majority stake in the unit to Canadian auto parts group Magna and Russia’s Sberbank, a decision long favoured by the German government under Chancellor Angela Merkel.
With about two weeks to go until a general election in Europe’s biggest economy, this would clearly be a political victory — but the question remains whether it will also be an economic one.
Merkel said that GM’s recommendation — which would see Magna’s Brussels-listed rival bidder RHJ International losing out in the battle that has dragged on for months — is going to be tied to conditions.
Although she said that those conditions would be manageable and negotiable, doubts remain about whether this will be the new beginning the company is hoping for.
“The most meaningful choice would have been a global company that produces several millions of cars (per year), such as GM or a Chinese producer. Magna is not a producer of cars in the classic sense, and I could imagine that some other producers could be upset about the decision. As a consequence, Opel may lose some contracts,” said NordLB analyst Frank Schwope.
“This seems to be a political decision rather than an economical one.”
GMAC’s Christmas present
The Fed donned the red suit on Christmas eve for GMAC, giving the troubled auto finance company the nod to become a bank holding company.
The speedy approval should not come as a surprise, given that GMAC lends to consumers and GM depends on the finance company to sell cars — factors that could make its survival seen as key to fixing the economy.
The new status gives the company access to government lending programs and should allow it to continue financing loans for GM cars.
“In light of the unusual and exigent circumstances affecting the financial markets … the board has determined that emergency conditions exist that justify expeditious action on this proposal,” the Fed said in a statement.
The bank holidng status will come at a cost to GMAC’s majority owner Cerberus and minority owner GM: Both must cut their stakes in the company to comply with regulations that prevent many kinds of companies from owning too big a share of a bank.
DEALS OF THE DAY
** Nissin Foods Holdings, Japan’s top instant noodle maker, said it would buy a one-third stake in Russia’s largest instant noodle group Angleside Ltd for about $296 million, making a foray into the fast-growing market.
Does anyone else think that it’s a cruel karmic-realignment that GM execs are in part responsible for dragging their company into such a mess while finding a means to be forced to cash out on their stake in the company and are walking away with pennies on their stashed away dollars?
Yahoo’s deal with Google: Band-Aid
So Yahoo and Google scaled back the terms of their search advertising deal in what looks like a last-ditch, attempt — at least for Yahoo — to get it past U.S. regulators.
Some analysts called it the Band-Aid deal, while others said it smacks of desperation.
Frost & Sullivan’s digital media global director Mukul Krishna said the revised terms were “more of a Band-Aid than the extensive surgery” Yahoo needs.
Barclays Capital’s Douglas Anmuth had a similar take: “We have long viewed the search outsourcing deal as a Band-Aid-not-a-panacea for Yahoo, but compromised terms or an outright rejection of the deal would likely force Yahoo to consider other strategic measures.”
Those “other” measures are a merger of Yahoo and Time Warner’s AOL unit, or Yahoo shareholders’ ultimate dream: Microsoft coming back to woo Yahoo.
Eric Jackson, the dissident Yahoo shareholder who sold his fund’s 3 million Yahoo shares in September after being convinced regulators would nix the Google deal, said: “You just gotta hope that the love bug bites Microsoft again and they want to come back.”
Sanford Bernstein analyst Jeffrey Lindsay said he expects Yahoo’s deal with Google to falter and for Microsoft to come back next year with a bid of around $20 per share. That may not sound too bad considering Yahoo is trading at $13, but remember that the last Microsoft offer had been for $33 a share.
AIG says to report ‘earnings’. Really???
American International Group, the once giant insurer which has become best known as a sinkhole for government money, says it will report third-quarter results on Nov. 10.
Most notable was how AIG described what almost certainly was one of the ugliest reporting periods in financial history: “AIG’s earnings release and financial supplement will be available in the investor information section” of its website.
Earnings? According to the Merriam-Webster dictionary the use of the word “earnings” means money was earned during the quarter, or that the company will report there was money left in the coffer after pay outs. That is unlikely, at least based on analysts’ expectations.
Analysts’ on average expect AIG to report a loss of $1.69 a share in the third quarter, according to Reuters Estimates. It will be the insurer’s fourth-consecutive quarterly loss.
Maybe the insurer should have stuck with the word “results.” It would likely be more accurate and sounds better than the other alternative, “loss report.”
The company’s quarterly report will be its first since it accepted a $85 billion federal bailout on Sept. 16. Since, the insurer has been extended more federal aid, putting a total of $123 billion in taxpayer funds at its disposal.
So much for unbiased journalism. Did the author chew on a lemon before writing such a bitter-tongued article?
