In December, Anant Sundaram, a finance professor at Dartmouth's Tuck School of Business, reviewed the number's GM gave to Congress and came up with some interesting results.
He found the company was worth somewhere between -$15 billion and -$20 billion. GM said the company was still in positive territory. Professor Sundaram turned out to be right, GM not so much.
Now Sundaram has run some numbers again using projections from the "New GM."
Bottom line, the taxpayers have lost somewhere around 40 to 50% of their investment already.
Sundaram worked the calculations in two Excel spreadsheets, and I've gotten his permission to make them available to you -- my loyal blog followers.
The first spreadsheet, values GM based on it's incremental profit margin (it's losing money now.)
You can plug in your own assumptions for market size, market share and profit margin -- those are the key variables.
Some things to think about:
- Market size: The North American market -- the heart of GM -- is now about 12 million vehicles or so. Gm projects that will grow to 19 million by 2012 -- the valuation period Sundaram's analysis. Do you think that's reasonable? Put in your own estimate and see what happens.
- Profit margin: GM hasn't made more than a 1.5% net profit margin since 2001. Toyota's net profit margin is around 5% in a more normal market. Sundaram took an industry average of around 4% for this analysis. Too generous? You can decide to use a different number.
- GM's market share: it's now roughly 19%. Do you think GM can hang on to 18% of the market. The company sure thinks so. You can use a higher or lower number and see what happens.
If you are a real wonk, you can use Sundaram's EBIT analysis spreadsheet to calculate GM's value. If you don't know what EBIT is, you might want to stick to profit margin which is simpler.
Here is the Power Town bottom line: the sooner GM gets to big profits, the sooner the Obama administration can cut the financial cord.
But if GM never gets back to robust profits, well, that's a problem.
You see, if the federal government owns you, how can it let you fail?
Comments
I just wanted to commend Suzy Garob for her last comment of the night this evening. Marriage is indeed a contract, and should be honored as so. Good for you for pointing that out. The law is a good defense for women and we should make sure that we don't take for granted the legal rights that our great grandmothers fought for and won in 1920.
Darren,
What troubles me is the "solution" the U.S. Government is ramming down the throats of GM and other firms will not work.
Centralized planning didn't work in the Soviet Union. It will collapse. The only question remaining is when will the collapse take place?
Add to this the excessive borrowing by the U.S. and the IRS receiving smaller payments and troubles are down the road for others beside GM.
I caught the headline this morning, Mr. Bernanke is commenting on the U.S. deficits in the outlying years.
Your questioning of Jared Bernstein on auto manufacturing policy on the White House driveway a few weeks ago also was excellent. How you were able to keep a straight face and not even roll your eyes at his answers shows a lot of self restraint on your part.
One last question.
Off camera did you ask Jared Bernstein if he really believed what he told you?
I just can't believe he is that stupid, my guess is he just likes the taste of the Kool-Aid they serve at the White House.
Jerry,
Thanks. It is very sad to see how a great company like GM has fallen on hard times. I am not saying we should preserve companies just because they are big. I am just recognizing that there has been a great deal of pain caused by the collapse of this industry. Could some of it have been avoided with more far-sighted management? We'll never know.
It seems to me that incumbents rarely transition in time to meet the new challengers.
Darren
Darren this story and the first one you did with the professor were excellent.
Numbers don't lie. The math shows the probability of making this plan work are very small.
You have been asking really great questions to Obama administration officials. Unfortunately, they don't admit the hole they are digging for this country.
Darren this story and the first one you did with the professor were excellent.
Numbers don't lie. The math shows the probability of making this plan work are very small.
You have been asking really great questions to Obama administration officials. Unfortunately, they don't admit the hole they are digging for this country.