Detroit: General Motors should consider using its excess cash for a stock repurchase from the US government because of the low valuation of the automaker's shares, according to a JPMorgan Chase & Co analyst.
"GM is likely to consider [and should consider] a share repurchase, especially given its low valuation," Himanshu Patel, who is based in New York, wrote in a research note. "One idea would be for GM to use its cash to buy back part of the shares held by the US government."
GM, 33 per cent owned by the US Treasury Department, will probably contribute less to its underfunded US pension than JPMorgan had expected, said Patel, who rates GM "overweight".
The automaker said that it finished the first quarter with $29.6 billion (Dh108 billion) in unrestricted cash.
GM made a $2 billion stock contribution in January to the US pension, which the company has made progress in funding due to good asset returns and a favourable discount rate, chief financial officer Dan Ammann said on a conference call. Excluding the contribution in January, the pension was underfunded by $11.2 billion at the end of March.
Overfunded position
While GM wants to get closer to having a funded pension, "we obviously don't want to get into a significantly overfunded position either," Ammann said.
GM may make pension contributions of $2.7 billion this year and no contribution after that, Patel said in the report. He previously forecast that GM would make a $6 billion contribution in both 2011 and 2012.
"This discussion only amplifies the now-growing debate about what GM will do with its excess cash," Patel said. GM may have gross cash of $36 billion by year-end, he said.
GM is focused on immediate priorities including fully funding its pension and operating with minimal debt, Jim Cain, a spokesman, said in a tele-phone interview.
"What we do with excess cash down the road, nothing's been ruled in or out," he said.
In addition to buying stock from the US, GM could also purchase shares held by the Canadian government and the United Auto Workers union's trust for retiree health care, Patel said.
Buying back stock would mitigate concerns about additional shares coming to market, Patel said.
The US Treasury planned to wait for GM's first-quarter earnings before deciding whether to sell more of its investment in the nation's largest automaker, a person familiar with the matter said last month.
Lock-up ending
The Treasury can sell some of its remaining 500 million GM shares starting May 22. The US took a 61 per cent ownership of GM as part of the automaker's $50 billion government-led bailout and bankruptcy reorganisation in 2009.
After selling shares for $33 in an initial public offering in November, the US would need to sell its remaining equity for about $53 a share to break even on its investment.
Mark Paustenbach, a Treasury spokesman, didn't respond to an e-mail request for comment.
GM's first-quarter North American profit had disappointed investors as higher spending on sales incentives, marketing and engineering costs reduced the benefit of soaring revenue. Net income more than tripled to $3.37 billion, or $1.77 a share, from $1.07 billion, or 55 cents, a year earlier, GM had said in a statement.
Higher operating expenses cut the company's profit by $700 million, GM said. The rising costs denied investors the results they expected and contributed to the stock's biggest decline in more than two months, Adam Jonas, an analyst with Morgan Stanley, said in a telephone interview.
"Nobody owns GM to meet numbers; they own GM to beat numbers by a significant amount," said Jonas, who's based in New York.
The quarterly profit was GM's fifth straight and its largest net income since at least 1990. GM's total first-quarter revenue rose 15 per cent to $36.2 billion.
Engineering costs
Engineering and mark-eting costs each rose $200 million, and incentive spending cut profit by $300 million, GM said. CEO Dan Akerson said on a call with analysts that the first-quarter results were "on plan" and the company must focus on reducing costs.
