For the first time since 2005, General Motors Co. stock is out of the junk category. With the U.S. Treasury selling off its last shares in “Government Motors,” the Detroit automaker recently received a significant show of support from Moody’s Investors Service, which upped its debt rating from Ba1 to Baa3.
Neither of the other major ratings agencies, Fitch and Standard & Poors, has followed, but Moody’s move offers a psychological boost for a company that plunged into bankruptcy in June 2009 — emerging only with the help of a $50 billion federal bailout.
As 2014 approaches, there are the clear signs momentum is finally working in automaker’s favor, although there are also serious challenges that could again trip the company up.
On the financial side, GM has delivered a string of profits since emerging from Chapter 11 bankruptcy in July 2009, including this year’s second quarter net profit of $1.2 billion. While that was down from $1.5 billion in the same quarter of 2012, a hefty tax bill dragged down this year’s performance. Still, at 84 cents a share prior to one-time charges, compared to a consensus forecast of 76 cents, it was a pleasant shock for Wall Street.
Of course, it helps to have a balance sheet cleared of billions of dollars in debt by the run through bankruptcy court. And it doesn’t hurt that a significant chunk of the automaker’s legacy costs were shifted off its balance sheet by the creation of the United Auto Workers Union’s retiree medical trust fund, or VEBA.
Mega-investor Warren Buffett offered his own endorsement in August, upping his stake in GM by 60 percent. The Wizard of Omaha now holds 40 million shares, or just under 3 percent of GM’s outstanding stock.
Those investors not scared off in mid-2012, when GM plunged under the $20 mark on the New York Stock Exchange, have since been rewarded. In early October, GM shares were fluttering in the mid- to high-$30 range, a roughly 10 percent hike over the price set during GM’s IPO in November 2011.
That said, GM stock is well off the nearly $40 per share peak of the weeks after that public offering — never mind optimistic early forecasts predicting a surge to $50 and beyond. One can only imagine the frustration felt by GM’s CEO Dan Akerson, watching startup Tesla Motors running another record at $194 a share around the beginning of October — a massive 750 percent gain from its 52-week low.
What’s holding GM back? There are those who question whether things have changed all that much despite the benefits of bankruptcy. And where Tesla seems to have convinced investors it belongs alongside high-flying tech giants like Apple, GM remains lumped into the gritty manufacturing sector. (Which is particularly ironic, as a new study of the world’s most innovative companies by Boston Consulting Group ranks GM in the 13th position, not far behind Toyota or tech leaders such as Apple.)
But perhaps the biggest albatross around GM’s corporate neck is Europe, where it has had 14 years of red ink, confounding a seemingly endless stream of promised turnaround plans. The latest, drawn up by GM Vice Chairman and former Wall Street auto analyst Steve Girsky, takes the relatively shocking step of closing a key German assembly plant — a move largely unheard-of in modern Europe. If the strategy works, GM’s balance sheet could positively levitate. Another failure, meanwhile, could very well lead to investor demands for the ouster of Akerson, Girsky, and others on the senior management team.
Who would replace them? That’s a matter of debate. In a surprising speech in mid-September, Akerson suggested it is “inevitable” that we’ll see a “car gal” be appointed CEO at one of the Detroit OEMs, something pundits quickly took as a suggestion that GM Global Product Chief Mary Barra could take over the reins. Barra’s talents, however, are also being tested as a flood of new GM products comes to market.
Ultimately, that’s what will determine General Motor’s long-term success or failure. The good news for the automaker is that many of its latest models are winning rave reviews. The new Cadillac ATS was named the 2013 North American Car of the Year, and influential Consumer Reports declared the new Chevrolet Impala not just the best large sedan, but its choice as best sedan, period. On the other hand, Chevy blew it with a Malibu redesign and had to race revisions of the midsize model to market the vehicle in time for 2014.
It was momentum GM couldn’t afford to lose, and it’s one reason why Toyota continues to breathe down its neck in the U.S. market. Significantly, almost two-thirds of GM’s sales today take place outside the U.S. The automaker is vying with rival Volkswagen for leadership in China, the world’s fastest-growing automotive market and one where Toyota continues to struggle.
There are good reasons why investors — and ratings agencies — remain cautious about GM. But the OEM seems determined to prove it has changed its ways since its bankruptcy. As new products roll out in the U.S., and as the European turnaround plan moves forward, we’ll have a chance to see if it’s right. db
PAUL A. EISENSTEIN is an automotive journalist and chief of The Detroit Bureau in Pleasant Ridge.