WHY ARE CAR STOCKS SELLING AT CLUNKER PRICES?
Plenty of investors fume when they think Wall Street isn't giving the stocks they own a fair shake. But few have the clout--or checkbook--of a Kirk Kerkorian when it comes to doing something about it.
On Apr. 11, the day before Kerkorian's $20.5 billion bid, Chrysler Corp.'s stock closed at 391/4--just four times Wall Street's 1995 earnings estimate of $9.50 a share. At the same time, the Standard & Poor's 500-stock index was trading at practically 17 times earnings. "I cannot tell you why Chrysler is trading at four times earnings," says Alex Yemenidjian, an executive at Kerkorian's Tracinda Corp. "But we propose to put our money where our mouth is. This undervaluation gives us an opportunity to acquire the company without any danger."
CLOSING THE GAP. By the same measure, all of Motown is a bargain--even as carmakers' profits hit record levels. Ford Motor Co., at 27, trades at about five times its projected earnings of $5.50 a share. General Motors Corp., at 44, has a price-earnings ratio of six, based on forecasts of $7.25 per share. Why? Burned investors still remember GM's $15 billion in North American losses from 1991 to 1993, not to mention Chrysler's second brush with oblivion in those years. And the more bearish worry that softening auto sales in the first quarter signal the beginning of the end of the boom.
But many others on Wall Street, while paring earlier bullish sales forecasts, still see several more strong years for Detroit--equal at least to last year, when U.S. car sales soared to 15.1 million units. And the next downturn, when it arrives in 1997 or 1998, will be different, they argue. This time, Detroit has been playing the hardworking ant instead of the spendthrift grasshopper: no crazy diversifications into aerospace or savings and loans, lots of cash stored away for rainy days, and continued cost-cutting pressures to keep lean.
To boot, the Big Three virtually have closed the quality gap with the Japanese, who are struggling with yen-induced problems of their own. And Detroit has a lock on the fastest-growing segment of the car market: light trucks, which includes minivans and sport-utility vehicles. "The market doesn't fully recognize how much the competitive balance has tipped back in favor of the domestics," says Theodore Shasta, auto analyst at Loomis, Sayles & Co., a big owner of Big Three shares. "The domestic manufacturers are as strong as they have been in 30 years."
Kerkorian's move on Chrysler could have some spillover effects on GM and Ford shares. Shasta estimates that Ford could rise to 30, and GM to about 50, as investors figure that savvy player Kerkorian is right about auto stocks' valuations. And if Kerkorian does nab Chrysler, the buyout will leave investors with some spare cash. "If you suck $20 billion out of Chrysler and put it back in the hands of investors, some of it goes into Ford and GM," Shasta reasons. The two bigger car companies fetch slightly higher multiples than Chrysler to begin with, largely because they have much larger operations overseas--the better to take advantage of Europe's emergence from recession and blazing markets in countries such as Brazil.
TOO ROSY? Don't look for anything approaching the $9.50-a-share pop that Chrysler shares enjoyed on Apr. 12, though. "I don't think you could make a case for either General Motors or Ford being takeover candidates," says auto analyst David B. Healy. GM, with a market capitalization of $33 billion, is simply too gargantuan to take over--and its fitful struggles to remake itself are still likely to scare off potential suitors. Ford, with its $28 billion market value, is a behemoth, too--and the Ford family's control of a 40% voting stake is an additional deterrent.
Indeed, there's plenty of pessimism keeping car-company stocks close to earth. A manager of a major Boston mutual fund who has been selling auto stocks, including some of his large Chrysler holdings, thinks expectations for the industry still are too rosy. "The cycle is going to be much softer than expected," he says. This manager seized on the Kerkorian-induced market euphoria to get rid of more Chrysler stock. Other nonbelievers certainly will follow.By Kathleen Kerwin in Detroit