General Motors Struts It’s Stupidity

I see that GM plans on buying back stock to fend off the unwanted attention of several shareholders who are/were thinking of filing suit against the company for building up a “cash hoard” instead of giving all of its profits (“returning cash”) to shareholders. Rather than face its tormentors in court – as the company should – it has knuckled under to pressure (including one bozo who demanded a seat on the board (for what reason he merited one, I don’t grasp).

This is the same company that went bust back in 2008-9 and had to go crawling to the governments of Canada and the US for bailout money. And now it is determined to pay out its cash cushion just to fend off greedy speculators rather than face them down in open court and call them what they are, leaches on the face of the capital markets.

Worse than that, when we measure the balance sheet strength of GM today using the SVA “Stability Ratio” as the fundamental measure of balance sheet quality, it turns out that the quality of the GM balance sheet today is only somewhat better than the GM balance sheet in 2008 before plunging into bankruptcy. Indeed, given the highly cyclical nature of the auto business, the Stability Ratio of today would only be rated as reasonably but far from unduly strong. We would certainly not consider that the company is a hoarder of cash!

Looking at the valuation of the company in the stock market, I see that despite the apparently rosy outlook for profits that the stock market is refusing to pay up to the usual highs that the stock enjoyed before 2008-9, and if one of the reasons is that management is willing to back down to any two-bit hyena than it does not merit anything more as the financial risks are too great to bear in another cyclical slowdown.

From my point of view, we can look on this company and happily eschew its stock for any kind of investment – and that is our stance. “Interesting but…”. Put yourself in the shoes of the governments who bailed them out, and the unions who still rely on the success of this company, and the reaction to this story is – or should be – a lot different!


About rosshealy

C. Ross Healy, MBA, CFA Chairman, Strategic Analysis Corporation Ross Healy began his investment industry career in 1965 as a securities analyst for Midland Osler Securities. He was a co-founder of Sceptre Investment Council in 1970, a leading Canadian money manager. In 1984, he became Director of Research at Merrill Lynch Canada, and during this time provided support for the late Dr. Verne Atrill, the theorist who decoded the mathematics underlying the Theory of Accounting Dynamics upon which the Strategic Analysis Corporation (SAC) methodology is based. After supporting and collaborating with Dr. Atrill for many years, he joined SAC as Chairman and CEO in 1989 following the death of Dr. Atrill. Ross Healy is a past president of the Toronto CFA Society, and served on the board of the Financial Analysts Federation (now the CFA Institute) as Chairman of the Financial Analysts Journal committee, the academic arm of the CFA Society. He has served on the Financial Disclosure Advisory Board of the Ontario Securities Commission, and was a member of the Executive Committee of Trinity College, University of Toronto, chairing the Investment Committee. He currently serves as the Chairman of the Board of Trustees of Eglinton St. George’s United Church of Toronto. He contributes investment analysis to print, radio, and television media, and has been appearing regularly on Business News Network (BNN) for the past 15 years, and the Canadian Broadcasting Corporation (CBC). There is an award-winning book written about his analysis leading up to the collapse of Nortel Networks (The Bubble and The Bear, How Nortel Burst the Canadian Dream, by Douglas Hunter, Doubleday Canada, 2002. He was the “Bear” in the book.). Email Address: Company Website: Telephone (work): 416-498-3604 x 133 Cell: 416-258-8342
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