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It takes a lot of arrows to kill an elephant / What rises like a rocket and falls like a feather?

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August 06, 2008 – Comments (3) | RELATED TICKERS: GM , TTM , COST

 

As the old saying goes "It takes a lot of arrows to kill an elephant."  Well my friends the General, good old General Motors (GM), may have taken one too many lately.  I came across this great saying while reading the Backseat Driver column in Forbes magazine recently.  The thought of a giant elephant, or in this case oliphant, made me think of this cool scene in Lord of the Rings.

I've been saying for years…and 63+ CAPS points…that General Motors is one of the worst run companies that I have ever come in contact with.  It squandered the recent glory years of auto sales where a booming economy fueled by cheap credit, cheap auto leasing, and low gas prices drove light vehicle sales in the United States to new records year after year.  Even the worst-run companies can muddle along during good times, but now that times are tough the chickens are coming home to roost.  It's no secret that General Motors is in rough shape.  Now there is increasing talk about how one of the "Big 3" (if that isn't a misnomer I don't know what is) will eventually have to file for bankruptcy (see article: Big Three face bankruptcy fears).

CNBC is going to run a special on this subject called "Saving General Motors" tonight at 9:00 PM EST.  It supposedly is an optimistic look at what GM must do to save itself.  I definitely plan on watching it.  After years of disliking the company, I’m now pulling for GM survive this mess that it has gotten itself into.

CNBC: Saving General Motors 

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It’s not just U.S. automakers that are having problems.  Even the cream of the crop, Toyota (TM) recently announced that it will take a huge charge to cover residual value losses from leasing at its Toyota Financial Services arm (see article: Toyota Plans Reserves For Losses on U.S. Leases).  This is the residual value issue that I predicted would begin to plague automakers.

Even car manufacturers in emerging markets are having problems.  I have had serious concerns about Tata Motors’ (TTM) recent acquisition of Jaguar and Land Rover from Ford and how profitable the $2,500 car that it plans to introduce later this year (the Nano) could be for some time now.  Now the company has even more problems.

Apparently, there has been a lot of controversy surrounding the new Nano plant that Tata is trying to construct lately which could possibly raise the costs for building or even delay the launch of the new model.  Numerous Indians are staging protests against Tata and the government claiming that parts of the 1,000-acre area that was provided to the company for the plant was taken by force. 

Just last week a manager who was overseeing the construction of the plant was beaten up by a group of thugs, causing many workers fear for their safety and leave the job site.

Scheduled for an October launch of the Nano, Tata has already had to scale back its initial production targets and it has begun asking suppliers to send parts to a different factory.  Tata's managing director Ravi Kant recently said that TTM will remain committed to opening the Nano factory in Singur as long as "our patience lasts."  If the factory plans are scrapped the Nano could face some serious delays. 

These Nano problems come at a time when Tata has been reporting slower than expected results.  Its growth in its commercial vehicles segment, one where it commands a 60% share of the Indian market has slid to the low single-digit range as expensive gas hurts truckers' profits.  Higher interest rates aren't helping the company either. 

Also, as I predicted when the acquisition was first announced, Jaguar and Land Rover sales have been terrible.  The bridge-loans that Tata signed to complete its acquisition of the brands have significantly increased its costs.  It urgently needs to refinance them.  The possible issuance of dilutive new shares could weigh on Tata Motors' stock, which is down nearly 50% year-to-date already.   

Trouble around Nano adds to Tata's difficulties

The Tata Nano

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Everyone knows the price of oil has fallen dramatically lately.  Naturally with falling oil prices comes falling gas prices.  However, as the old saying goes price that consumers pay for gas at the pump "rises like a rocket and falls like a feather."  Gas stations are quick to raise their prices when the price of gasoline is rising, but they drag their feet when it comes to lowering it.  This means more money in the pocket of gas station owners. 

This brings me to Costco (COST).  The lack of profit on the sale of gasoline through its stores and higher shipping costs have been a huge drag on the company, even causing it to get hammered by Mr. Market after it lowered its earnings guidance for the year a couple of weeks ago.  If the price of oil continues to fall, or even stays where it is today it would improve the company's gas margins and reduce its shipping costs.  The very same item that hammered the stock a few short weeks ago could actually provide it with a tailwind this quarter that might enable it to beat analysts' new lower earnings estimates.  Here's a telling quote from the company's CFO:

"Primarily, it's rising energy costs and its many impacts....It has impacted our gasoline profitability, although in the very recent couple of weeks that has improved. It's impacted our freight costs at all levels of the merchandise distribution chain. It's impacting the direct cost of merchandise frankly at a faster and higher rate of increase in the past six to eight weeks than before that."

I have added COST to my CAPS portfolio with the assumption that it a temporary fall in the price of oil will help it to beat next quarter’s reduced estimates.

Deej

3 Comments – Post Your Own

#1) On August 06, 2008 at 3:29 PM, LordZ wrote:

OMG thats one ugly car...

I would think that walking would look a lot cooler than being caught dead in that thing.

 

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#2) On August 06, 2008 at 5:57 PM, eldemonio (98.04) wrote:

It depends on how you walk.  I agree that a nonchalant saunter would look cooler.  Maybe a cool, pimp limp stagger would look cooler, but any old walk, I don't think so.

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#3) On August 07, 2008 at 7:07 AM, TMFDeej (99.25) wrote:

This version of my latest blog post contains a corrected Nano picture (thanks Gnubee)

Deej 

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