General Motor’s (GM) initial public offering that took place yesterday is all over the news and several people have asked if they should buy shares of GM.

Well you’re in luck because you (the taxpayer) already own a stake in GM.  In fact, you reduced your 61% ownership stake down to about 26% yesterday.  Unfortunately, your sale resulted in a $4.5 billion loss.  (And GM shares are up about 7.58% today as of this writing, so it looks like you left money on the table.)

But I’m sure that is not what you meant.  Let’s take a closer look…

From a valuation standpoint

GM trades at roughly 8.4 times this year’s earnings, based on its net income during the first three quarters of 2010.  This may seem reasonable on the surface, but there are a few red flags to consider. 

First, GM expects fourth quarter earnings will be significantly lower than the first three quarters of the year.  This should be no surprise as sales during two quarters of 2010 greatly benefited from Cash for Clunkers. 

Second, GM’s sales may be up this year, but they have sold more vehicles this year to rental and government fleets, which tend to be less profitable than retail sales.  Additionally, It is not unreasonable to think that government sales could decrease once the U.S. Treasury divests its ownership stake in GM.

Another red flag is that GM’s pension plan is underfunded by $27 billion, which could hit earnings in the future. 

I also worry that accounting tactics may have pushed forward earnings at the expense of future earnings for the benefit of this IPO, but I haven’t done a deep enough dive into their statements to conclude this with any certainty. 

More broadly speaking

I think GM’s biggest challenge is the auto industry’s longer-term structural overcapacity – an overhang of productive capacity that is as much as 20% higher than demand.  In other industries, a cleansing wave of mergers and acquisitions often scrub away the excess.  This didn’t happening in the automotive industry.  Instead governments propped up weak companies.

There is a certain familiarity that individuals have with GM the company as well as GM the stock, which for many years produced steady dividends for investors.  But years of sub-par products, debt, and high industry costs have caught up with them.

Before buying stock in any company, the crucial question we must ask ourselves is: Would we want to own shares of this company 10 years from now?  20 years from now?  I’m not sure this company will be around forever.  They simply are not financially viable – this is evident by the multiple bailouts they have received from the U.S. government over the years.  Overcapacity and a lack of competitive advantage spell trouble for the long term.

Unfortunately, we as taxpayers already have “invested” $50 billion by bailing out GM since 2008.  To breakeven on that investment, according to The Wall Street Journal, the Treasury would need to sell their remaining shares at an average price of $52.79 a share, or 48.7% higher than its price today.  That’s also roughly 3.5 times what the company was worth at the end of the last U.S. bull market – differences in capital structure make this comparison a bit unfair, but I think you get my point.

I think it’s safe to say the government made a losing investment with taxpayer dollars.  Don’t make the same mistake with your personal money.

Peter Lazaroff, Investment Analyst

www.acrinv.com