Corporate Finance

Why GM May Be Worth More Than Ford


It has been barely a year since General Motors emerged from bankruptcy, and already the carmaker may be worth more than crosstown rival and current industry darling Ford Motor (F). True, GM has just one quarter of profit behind it. And its shares don't trade as it prepares an initial public offering to wean itself off government assistance. Yet based on one analyst's figures, GM may be worth $47 billion, more than Ford's stock market valuation of $36 billion.

Looking at factors including potential earnings and cash flow, assets, and liabilities, JPMorgan Chase (JPM) analyst Eric Selle puts a $70 billion price tag on GM. That would equate to an eventual return of 47 cents on the dollar for holders of bonds issued by GM before its bankruptcy that will be converted to stock and warrants in new GM. Based on the price those bonds traded at in early July, GM's value would be $47 billion.

Why the higher price tag for GM? For starters, the company has a better balance sheet. Thanks to the government-sponsored bankruptcy, GM owes just $15.4 billion to its creditors and has $30 billion in cash. After paying down $4 billion of debt on June 30, Ford owes some $27 billion and its cash hoard is below $20 billion, though the company is expected to have generated cash in the second quarter. Interest payments alone cost Ford $542 million in the first quarter, compared with $337 million for GM.

When it comes to selling cars, GM is much stronger in developing countries. It has 13 percent of the Chinese market to Ford's 2 percent, and its 20 percent of Brazil's car sales is double the share of its Detroit rival, according to Standard & Poor's (MHP) debt analyst Gregg Lemos-Stein. GM Vice-Chairman and CFO Christopher P. Liddell told analysts on June 28 that the company has reduced costs to the point that it can make money even in today's depressed car market. "We have redesigned the company to be something we weren't a few years ago," he said.

That isn't to say that everyone is sold on GM. Its European business lost $506 million in the first quarter and isn't expected to break even until next year at the earliest. Ford earned a pre-tax profit of $107 million in Europe in the first quarter. And GM's pension plan is a concern. Today, it is underfunded by $26.8 billion, while Ford's is underfunded by $11.9 billion. Management is another question, says KeyBanc Capital Markets analyst Brett D. Hoselton. Under Chairman and Chief Executive Officer Edward E. Whitacre Jr., GM has had extensive turnover in the executive ranks, and few think that Whitacre, at 68, is the company's long-term leader. Liddell is a possible replacement, but GM has not laid out a succession plan. Says Hoselton: "I don't know who will be running the company."

GM's bond-based valuation bodes well for its pending IPO. The company is eyeing a November stock offering in which the government could sell one-fifth of its $41 billion stake. Once GM has a tradable stock, its value may climb. "The stock will be more liquid [than the bonds] so the universe of prospective buyers will be much greater," says Kirk Ludtke, senior vice-president of CRT Capital Group in Stamford, Conn. Ludtke calculates that Ford trades for about 5 times its estimated operating earnings for 2011, while GM is effectively at 3.8 times 2011 operating earnings. So even with its higher market value, he says, "we think GM is trading at a discount compared to Ford."

The bottom line: By shedding many financial burdens in bankruptcy, GM gained some advantages over Ford. Now it must prove itself in the marketplace.

David_welch
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.
Naughton is a reporter for Bloomberg News in Detroit.

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