dwasson
06-21-2005, 08:08 PM
From: Forbes.com (http://www.forbes.com/2005/06/21/general-motors-stock-investment-cz_dl_0620soapbox_inl_print.ht ml)
Buy GM Before The Chinese Do
Richard Lehmann, 06.21.05, 11:45 AM ET
Making my recommendation to buy the General Motors debt in the April issue of the Forbes/Lehmann Income Securities Investor and subsequently in my Forbes column was one of the easiest calls I've ever made. Here you had a company being threatened with a downgrade to BB yielding more than 10% when the average bond rated BB was yielding 6.79% and the average preferred 7.29%.
Lock in yields of 12% plus on Canadian energy royalty trusts. Get the best names in the bunch from Forbes/Lehmann Income Securities Investor.
As I indicated then, General Motors (nyse: GM - news - people ) was suffering from a lack of buyers in what is a trillion-dollar high-yield market faced with having to absorb up to $300 billion of new supply. The absorption of so much debt was not being helped by the negative media attention, which portrayed GM as being on the road to bankruptcy.
All this changed dramatically when billionaire Kirk Kerkorian, as savvy an investor as ever lived, stepped up with a bid for GM common stock to increase his holdings to over a billion dollars. Only Warren Buffet could have created a greater stir or quicker turnaround. At 87 years of age, however, one can assume that Kerkorian is not looking for a long-term investment.
As I mentioned in my Forbes column, at a market price of half its book value, GM is an attractive takeover candidate for entities like China's biggest automobile manufacturer, the Shanghai Automotive Industry (nyse: SAIC - news - people ), which would like to become a leading exporter of cars. SAIC and GM already have a strategic joint venture which currently has a capacity of 500,000 vehicles in China per year, including autos like the Buick Regal and Chevy Sail.
At this price, the Chinese could shutter and write off GM's plants in the U.S. and have the distribution network, technology and international operations for free. And if it sold GMAC it could probably get most of their money back as well. But I don't want to bore you further with such stockholder concerns. What's the outlook for us creditors?
The GM $25 preferreds bottomed at around $18 for most issues shortly after the S&P downgrade. Since then they have recovered to the $20 to $21 range. My guess is they will continue to recover to the $23 to $24 range before year-end. Hence, they're still a buy here.
Those who are looking to make a sizeable long-term commitment can do even better with the GM bonds. The over-supply situation will take a little longer to clear up here so yields are still in the 10%-plus range for the long maturities. I would list specific issues but, with over a thousand issues, you have a lot of coupon and maturity combinations to choose from. You should select from what's available and cheap the day you're shopping.
Concurrent with the GM downgrade, Ford Motor (nyse: F - news - people ) was also downgraded to junk by S&P but retained its investment grade rating from Moody's and Fitch. Hence, its preferreds did not drop as much and are currently trading in the $21 to $23 price range. The yields, however, are still close to those of GM since the coupon rates on the Ford preferreds are generally higher than for the GM issues, which are all PET bonds.
Note that the Ford preferreds are mostly third-party trust preferreds created by a brokerage firm. Hence, they are not as easy to find. There are 11 such issues, four of which we have recommended (KSK, PIJ, PJE and FpS which is a convertible). Ford also has plenty of bonds to choose from, but the yields here are below the GMs.
Buy GM Before The Chinese Do
Richard Lehmann, 06.21.05, 11:45 AM ET
Making my recommendation to buy the General Motors debt in the April issue of the Forbes/Lehmann Income Securities Investor and subsequently in my Forbes column was one of the easiest calls I've ever made. Here you had a company being threatened with a downgrade to BB yielding more than 10% when the average bond rated BB was yielding 6.79% and the average preferred 7.29%.
Lock in yields of 12% plus on Canadian energy royalty trusts. Get the best names in the bunch from Forbes/Lehmann Income Securities Investor.
As I indicated then, General Motors (nyse: GM - news - people ) was suffering from a lack of buyers in what is a trillion-dollar high-yield market faced with having to absorb up to $300 billion of new supply. The absorption of so much debt was not being helped by the negative media attention, which portrayed GM as being on the road to bankruptcy.
All this changed dramatically when billionaire Kirk Kerkorian, as savvy an investor as ever lived, stepped up with a bid for GM common stock to increase his holdings to over a billion dollars. Only Warren Buffet could have created a greater stir or quicker turnaround. At 87 years of age, however, one can assume that Kerkorian is not looking for a long-term investment.
As I mentioned in my Forbes column, at a market price of half its book value, GM is an attractive takeover candidate for entities like China's biggest automobile manufacturer, the Shanghai Automotive Industry (nyse: SAIC - news - people ), which would like to become a leading exporter of cars. SAIC and GM already have a strategic joint venture which currently has a capacity of 500,000 vehicles in China per year, including autos like the Buick Regal and Chevy Sail.
At this price, the Chinese could shutter and write off GM's plants in the U.S. and have the distribution network, technology and international operations for free. And if it sold GMAC it could probably get most of their money back as well. But I don't want to bore you further with such stockholder concerns. What's the outlook for us creditors?
The GM $25 preferreds bottomed at around $18 for most issues shortly after the S&P downgrade. Since then they have recovered to the $20 to $21 range. My guess is they will continue to recover to the $23 to $24 range before year-end. Hence, they're still a buy here.
Those who are looking to make a sizeable long-term commitment can do even better with the GM bonds. The over-supply situation will take a little longer to clear up here so yields are still in the 10%-plus range for the long maturities. I would list specific issues but, with over a thousand issues, you have a lot of coupon and maturity combinations to choose from. You should select from what's available and cheap the day you're shopping.
Concurrent with the GM downgrade, Ford Motor (nyse: F - news - people ) was also downgraded to junk by S&P but retained its investment grade rating from Moody's and Fitch. Hence, its preferreds did not drop as much and are currently trading in the $21 to $23 price range. The yields, however, are still close to those of GM since the coupon rates on the Ford preferreds are generally higher than for the GM issues, which are all PET bonds.
Note that the Ford preferreds are mostly third-party trust preferreds created by a brokerage firm. Hence, they are not as easy to find. There are 11 such issues, four of which we have recommended (KSK, PIJ, PJE and FpS which is a convertible). Ford also has plenty of bonds to choose from, but the yields here are below the GMs.