Monday, November 10, 2008

New target stock price for GM: $0.

Yes, you read that right. A new analysis by Deutsche Bank out today is predicting GM stock to be worthless in the next 12 months. What impact would that have on the American economy?

Now I'll be the first to say that GM has gone down the wrong path over the last few decades - encouraging over-consumption with the SUV craze and ever larger, more powerful engines. But that doesn't mean they can't recover.

GM has been our family's business since my first birthday. I would be extremely sad to see the company go bankrupt. But at this point, it seems like nothing less than a complete overhaul of the entire operation could save it. GM burned through more than $7B in cash in the last 3 months alone - and is forecasted to run out of cash completely as early as 6 months from now. They called off merger talks with Chrysler, and are now begging Congress for money. Even a government bailout at this point will only delay the inevitable unless it is accompanied by a complete restructuring.

From a climate perspective, maybe that is a good thing. GM could retain its profitable truck models, scrap many of the overlapping brands and models in between (SUVs and full size cars) and shift the rest of its focus entirely on small hybrid/electric cars and remake itself as an environmental leader, pushing for cutting edge technology adoption, and positioning itself as a future-looking growth company. At least that would keep the factories and retail outlets open - and could maybe save a million jobs.

As of today, here are some companies that now have approximately the same market cap (value of the company) as GM:
Abercrombie and Fitch
Weight Watchers
Marvel Comics
Smuckers (yes, the jam and jelly maker), and
Wabtec Corp (which makes brakes for trains)

For the record, GM finished at $3.36 today, down over 22% to a 62 year low. As a result, the S&P cut GM's credit rating further into "junk" status.