Cheap US auto stocks unlikely to offer much value

New York/Detroit: General Motors shares are at their lowest level since 1954 and its benchmark bonds yield 15 per cent compared with the 10-year Treasury's four per cent yield, but it's not necessarily cheap, investors say.

Whether GM and its smaller rival Ford Motor represent value to investors and creditors at these levels depends, in part, on whether industry-wide US auto sales are near bottom in their third year of decline.

But after sales tumbled to their lowest level in 15 years in June, no analyst is yet making that call. That leaves only high-risk, high-stakes investors to place their bets in a US auto industry burdened with high oil and commodity prices and a costly consumer defection away from trucks and SUVs.

A bond investor would be handsomely rewarded if GM and Ford merely steer clear of the abyss of default, and would reap a rich yield in interest payments while waiting for their junk bonds to rise.

But a stock reward could be much farther down the road, and an investment wiped out if the carmaker falls into bankruptcy.

The risk of an even deeper downturn in the US auto market and the prospect GM could be forced to raise up to $15 billion in new capital also make the stock a risky proposition, but its bonds could attract interest from some junk bond and distressed debt, or vulture, investors.

The myriad pressures on the top and bottom lines for the automakers, and the US economic slowdown, have made it hard to discern a value in the stocks and bonds.

"There's always value somewhere," said Andrew Feltus, portfolio manager at Pioneer Investments in Boston where he oversees $8 billion in high-yield assets. "We're definitely following the story closer as there is a lot of yield relative to the rest of the market."

Right price

"The price is right," said Feltus, who hasn't bought auto bonds yet, preferring their finance units. "It's more about comfort with their balance sheets."

Automakers and analysts had predicted a second half recovery in US auto sales near the start of 2008, but those hopes have vanished under progressively worse monthly sales reports since spring. Now some are predicting that 2009 could be even worse.

GM has been the worst performer in the Dow Jones industrial average for the first half of 2008. The stock has fallen 67 per cent since May 2005, when it lost its investment-grade rating.

Downward trend

Meanwhile, GM's 8.375 per cent bond due in 2033 traded at about 80 cents on the dollar in May 2005. The bonds have since plummeted to trade at a record low of 57 cents, enticing investors with yields of 15 per cent when the 30-year Treasury bond yield is 4.51 per cent.

Citigroup does not see GM or Ford stock as a solid bet at this point, with both companies struggling through restructuring that has cut thousands of jobs in the past three years but failed to keep up with market share losses.

But some analysts see Ford as a lower risk than GM at this point in the industry's slump. Ford has 16 per cent of the US market but a market capitalisation of almost $11 billion. By contrast, GM had 22 per cent of the market in June but is worth just $7 billion.

Ford's stock price has drawn support from the view that it has a marginally better liquidity position and readier access to new capital. Ford borrowed $23 billion in late 2006 to support its restructuring.