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Hidden Power under GM's Hood


You don't have to look beyond the 30 companies in the Dow Jones industrial average to find solid buys: With the market sinking nearly every stock in sight, the Dow is full of underpriced stocks brimming with long-term value, argue some market strategists.

One Dow stock they find irresistibly cheap: General Motors (GM), which tumbled from 93 in April to 50 in December, before edging up to 53 on Mar. 21. "The world's largest car and truck producer is one of the biggest bargains around," says Charles Lemonides, who is buying.

The Street, fearful that economic woes will further slow auto sales, is not thrilled by GM. The consensus rating of 20 analysts: Hold. They see it earning $3.21 a share in 2001 and $4.56 in 2002, down from $8.43 in 2000.

But to Lemonides, chief investment officer at ValueWorks@M&R Capital Management, GM has become a "sum-of-the-parts" play. With 550 million shares, GM's market cap of $30 billion is too low, he says. He figures GM deserves a value of $62 billion, or $113 a share.

Here's how Lemonides breaks up GM: Based on a multiple of four times cash flow, he puts the auto business at $40 billion, or 70 a share; at 10 times its operating income, he puts General Motors Acceptance Corp. (GMAC) at $15 billion, or 27; GM's 30% stake in Hughes Electronics, at $6 billion, or 11; and cash and equivalents, at $10 billion, or 18. Adjusted for GM's debt of $13 billion, or 13 a share, total value comes to $62 billion, or 113 a share.

"Management under John F. Smith Jr. has been unlocking part of the value in some of GM's assets," notes Lemonides. GM is in the midst of either selling or restructuring Hughes. The next target, he says, is its financing unit, GMAC. By Gene G. Marcial


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