Ford, GM … Who’s Next?

Call the Fed, my favorite burger joint down the street is experiencing distress. Yeah, I’ll take a double with cheese, hold the TARP.

Not really sure how Detroit sees this all working out. Does the UAW and the “big” three (two public, one private, all three collapsing) still think that they are entitled to some sort of government intervention? The new White House Administration has made it clear that they are ready to help Detroit, and Speaker Pelosi can’t be any more vociferous of her own intent. So the question is, where, oh where, will it end?

The automakers priorities have been out of whack for quite some time now. You cannot help but laugh when you hear GM is the worlds leading purchaser of Viagra. The Detroit News reported in 2006 that GM spent $17 million dollars on the “little blue pill”. Admittedly, this is a relatively small portion of the more than $5.6 billion per year that GM spends on health care for their employees (more than $1500 per car in 2006), but the Viagra problem is a symptom of an overall cost management illness.

Thomas Friedman, Pulitzer Prize winning columnist and author (”The World is Flat“), has some interesting insights into the situation in yesterday’s New York Times. He first recounts the history of our esteemed car companies and their insatiable appetite for funds to, … uh… innovate:

Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.

This included striking special deals with Congress that allowed the Detroit automakers to count the mileage of gas guzzlers as being less than they really were — provided they made some cars flex-fuel capable for ethanol. It included special offers of $1.99-a-gallon gasoline for a year to any customer who purchased a gas guzzler. And it included endless lobbying to block Congress from raising the miles-per-gallon requirements. The result was an industry that became brain dead.

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.” And, in February, D Magazine of Dallas quoted him as saying that global warming “is a total crock of [expletive].”

These are the guys taxpayers are being asked to bail out.

                - Thomas L. Friedman, NYT, Nov. 11, 2008

Friedman has a great knack for showing readers where we have been in very understandable terms and examples. He continues on to propose that Steve Jobs take a year off from Apple (AAPL) to come create the first “iCar”, which no doubt will run on MP3’s available only from the iTunes store. He really may be on to something there.

When looking at our ratings and valuations on companies like Ford and GM, it is really hard to reconcile the realities of Detroit with the opportunities to invest in depressed stocks. Well, maybe its not that hard. Right now, on a 13 week basis, GM and Ford are down around 70% each. The slide for GM has been an unrelenting death march from the high $80’s in 1999 to its present day. Ford’s decline from 1999 was a high price of $36 and change. Both companies have failed miserably to innovate or compete with their foreign counterparts.

Looking at the scatter plot chart, it is true that Ford and GM get a “Greatly Undervalued” rating right now from the Ockham methodology. We won’t drop coverage on them just because we think they are systemically broken (that’s Wall Street research). Instead, we basically sit here waiting to see if the government will again burn money by throwing it into the Detroit furnace. Please note, however, that when visiting our site, we slap an “ALERT” sticky note on both Ford and GM to highlight that our ratings can’t be viewed in a vacuum. While we advise doing a lot of homework on all companies, and think our clients need to look at multiple sources for their research, we also recognize that some truly deserving companies should be pointed out for the complete debacles they have become.

When looking at the major automotive manufacturers, we find Honda (HMC) and Toyota (TM) to be far more interesting (and they don’t get the yellow sticky note of death on our website.)