Thursday, September 27, 2007

Paperstand (GM, ZLC)

The WSJ’s “Heard on the Street“ column discusses GM (GM), saying that health-care problems hung over the stock for so long some investors stopped thinking of GM as an auto maker. Now that GM has foisted the retiree-health-care monkey onto the back of its union, the co's basic operations will get more attention, and that might weigh on the stock. Over the summer, investors grew increasingly negative on GM b/e of worries about consumer spending and the co's continually declining mkt share. That made the stock somewhat cheap, given its juicy dividend and overseas growth prospects. But since word spread about the health-care deal, GM's shares are up 25%. One reason for the jump is takeover speculation. Cerberus Capital Mgmt's takeover of Chrysler over the summer has made investors believe that GM could be next. But the deal would be big and, unless credit mkts undergo a serious thaw, very hard to finance. That leaves investors to evaluate GM, the auto maker. GM will need to improve the quality of its vehicles, and sell more of them, a challenge amid a competitive mkt. With oil prices around $80 a barrel the challenge could be even greater. The agreement does help level the playing field among auto makers, likely helping the US auto makers better compete globally. But one large auto investor quipped that "the bad news is now ppl will focus on quality," an allusion to the gap that is still seen between GM and other domestic auto makers and foreign competitors. GM trades at a relatively skimpy 10.5x its expected earnings of the next year. But the auto maker hasn't been able to generate positive cash flow in recent years and some analysts doubt it will be able to in the next year or two. And while the health-care deal will help GM control costs, GM's Japanese competitors are still more efficient. "Even if this goes through, unit labor costs are higher than foreign competitors" says David Dreman, of Dreman Value Mgmt. "It's a major step in the right direction but they'll still have a major cost disadvantage."

Barron’s Online “Inside Scoop” section reports that 4 institutions have disclosed large positions in Zale (ZLC) over the last 3 mo’s. The latest purchase came from hedge fund Citadel Investment. Citadel now owns 2.6m shares of Zale for a 5.3 % stake in the co. Earlier this mo, Breeden Capital Mgmt, SAC Capital and Hayground Cove Asset Mgmt disclosed new and/or increased stakes in Zale. Breeden Capital, founded by former SEC Chmn Richard Breeden, paid $83.6m for 3.8m shares of the co and reported the 7.7% stake as an activist shareholder. Ben Silverman, of, says, "The four filings combined probably send a positive long-term message." In terms of a signal for investors, Richard Breeden's purchase is "more noteworthy among the cluster," Silverman adds. "We know he's a value-focused activist investor, whereas SAC and Citadel are more generalists."

No comments: