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Pension Obligations Could Still Sink General Motors August 23, 2010

General Motors took the first step toward a new public offering last week with the filing of a massive Form S-1 with the SEC.  While exact terms of the offering are not known yet, Barron’s has estimated that the IPO transaction may be worth $15 billion and would result in a market capitalization of $60 billion.  With the United States Treasury owning over 60 percent of the company, the IPO represents a partial exit strategy for Uncle Sam and an opportunity for GM to shed the “Government Motors” stigma that has negatively impacted consumer perceptions.

Aggressive Pension Plan Assumptions – A Red Flag?

Tony Jackson raised an important point in today’s Financial Times regarding GM’s pension assumptions which should serve as a giant warning sign for anyone contemplating participation in the IPO.  Mr. Jackson noted that GM’s official assumption for returns on pension assets is 8.5 percent which is far above the yields available on government bonds traditionally used to fund long term pension liabilities and implies a need for the company to structure its pension plan like a “hedge fund” in order to achieve the necessary returns. Even based on aggressive return assumptions, GM’s United States based defined benefit plans were underfunded by $17.1 billion while non-U.S. plans were underfunded by $10.3 billion as of December 31, 2009.

Aggressive assumptions for pension plans is nothing new and a 8.5 percent figure is not as egregious as the double digit return assumptions that were often used during brighter times for financial markets.  However, it is self evident that achieving such returns will require GM to “reach” for yield in the fixed income portfolio or invest in equities or other assets classes.  Returns that fall below the 8.5 percent assumption will result in potentially much larger pension deficits and could wipe out a significant amount of shareholder equity.

As a point of reference, Berkshire Hathaway uses a 6.9 percent rate of return assumption in its defined benefit pension plan accounting.

Examining pension plan assumptions is perhaps one of the most overlooked factors in security analysis and few investors seem to be bothered by underfunded plans or aggressive return assumptions.  As we pointed out in a recent article regarding Kewaunee Scientific Corporation, failure to look at such factors can result in substantial erosion in shareholders’ equity over time.

New Start or More of the Same?

While GM’s initial public offering represents positive news for taxpayers and a “new start” for General Motors, there are ample signs beyond questionable pension funding that could lead us to believe that the company has not abandoned its old ways of doing business.  A couple of notable examples:  The company recently announced plans to acquire AmeriCredit in order to establish a captive finance arm that may be used to aggressively extend credit to borrowers who fail to qualify for prime loans.  The introduction of the Chevrolet Volt at an uncompetitive price of $41,000 is an excellent example of product development being driven by political considerations and the availability of tax credits rather than a careful assessment of consumer demand.

For taxpayers, any recovery of the government’s investment in GM should be a welcome development but investors should carefully consider the warning signs before sitting down at the other side of the table from Uncle Sam as the date of the IPO nears.

Disclosures:  None.

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GM’s Television Commercials Seem Out of Touch with Reality December 13, 2009

Any regular viewer of NFL football is well aware of GM’s advertising campaign starring former NFL star and current Fox Sports commentator Howie Long.  While many of the ads, particularly for Chevy trucks, are effective and amusing, the ad shown below seems immature and silly.  Comparing Honda vehicles to a lawnmower may have made sense in 1970.  It isn’t remotely amusing in 2009 and chances are the GM executives who find this clever are out of touch with reality.

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Disclosure:  As an American citizen and taxpayer, the author is an involuntary shareholder of General Motors.

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Categories: General Motors

Bob Lutz on the Chevy Volt August 12, 2009

As a follow up to yesterday’s comments on the Chevy Volt, here is an interesting Fox Business News video where General Motors Vice Chairman Bob Lutz makes the case for the new vehicle.

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Chevy Volt Hybrid vs. BYD e6 Pure Electric August 11, 2009

General Motors is claiming that the Chevrolet Volt hybrid vehicle can be expected to achieve 230 miles per gallon when used mostly in city traffic.  The Volt is a hybrid vehicle that has a 40 mile range on electric power when the battery is fully charged along with a small internal combustion engine that acts as a range extender for the battery once the 40 mile electric only limit is reached.

It should also be noted that the Volt will consume approximately 25 kilowatt hours for every 100 miles.  My local utility charges 12.76 cents per kilowatt hour which translates to $3.19 per 100 miles.

40 Mile vs. 249 Mile Electric-Only Range

While the claim of 230 miles per gallon seems impressive, BYD previously announced an electric-only vehicle that is reported to have an electric-only range far in excess of 40 miles.  I wrote about the BYD e6 electric car in early May.  The e6 has a 249 mile range on a full charge and can achieve a 50% charge in only ten minutes.  The e6 consumes 29 kilowatt hours per 100 miles but appears to be a larger vehicle than the Volt.

From what we know of the Volt and the e6, GM and BYD have come up with very different approaches.  The advantage of the Volt is that the internal combustion engine offers range extension without a recharge of the battery which is essential given the low 40 mile electric-only range of the Volt.  The advantage of the e6 is a very long electric only range coupled with the ability to achieve a 50% recharge in only ten minutes.  The disadvantage of the e6 is that drivers would be dependent on a recharge station once the 249 mile full charge range is exhausted.

Let the Market Decide…

It is surprising that very few comparisons have been made between these two very different approaches.  With BYD planning to introduce their vehicles to the United States market within a couple of years, we will soon learn which approach consumers prefer.  Hopefully competition will determine the outcome rather than government interference based on the Federal Government’s majority ownership of General Motors.

The following video is a brief account of GM’s announcement today regarding the Volt’s estimated fuel efficiency.

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Disclosure:  The author owns shares of Berkshire Hathaway which has an investment in BYD stock.

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