Tuesday, January 03, 2006

General Motors (GM)

An interesting report this morning from Bank of America Securities cutting the target price on GM to $13. GM has estimated its healthcare savings from its recent UAW agreement at $12 billion.

According to the analyst, the eventual savings will only be in the $7 billion range. What is also of interest is that at the tail end of the agreement which ends in 2011, GM may be required to contribute more cash to the VEBA structure than the $3 billion that has been "advertised."

In addition, the analyst correctly points out that the monetization of GMAC (sale of 50%) could result in a potential write-off of a GM deferred tax asset, further reducing the overall value of the business.

Shifting the capital allocation from a relatively high return GMAC business to increase the proportion of the business to the low-return automotive business seems to echo Peter Lynch's comments about watering the weeds and getting rid of the flowers.

2 Comments:

At 9:19 PM, Blogger xocoatl said...

Changing GM's price target to $13 is just as good as saying it's worth $0, given the debt and obligation load.

 
At 9:22 PM, Blogger xocoatl said...

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