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November 1, 2005

GOLDING’S TAKE: Japan’s car makers are the stocks to hold

As GM takes another lurch down to its worst share price in fifteen years, and the Japanese producers (almost) all take another lurch upwards in reported effectiveness, one is tempted to stand in the shoes of Kirk Kerkorian, the outrageously-old corporate raider who holds 9.9% of the out-of-orbit GM starship.

As GM takes another lurch down to its worst share price in fifteen years, and the Japanese producers (almost) all take another lurch upwards in reported effectiveness, one is tempted to stand in the shoes of Kirk Kerkorian, the outrageously-old corporate raider who holds 9.9% of the out-of-orbit GM starship.

By market capitalisation, GM is now worth a mere $15bn which is less than its cash in the bank. That sort of financial equation didn’t use to be possible until pension liabilities became such a big thing. But no longer can you buy the company, close the factories and walk off with the cash. These days, you are held liable for the comfort of the retired.

However, Kirk – now aged 88 – is inadvertently a large shareholder in Suzuki. He holds 9.9% of 20.1% – in that GM owns a fifth of the small-car specialist.

Today’s stock market value of Suzuki is $9.5bn. GM’s 20.1% share therefore is worth roughly $2bn. Kirk’s 9.9% share of GM is now worth less than that – closer to $1.5bn. Get yourself down to GM towers I would Kirk and do the switch. There may be a bit of tedious paperwork involved but I reckon a straight swap of your stake in GM for GM’s stake in Suzuki is just the ticket.

We know that they are listening. GM is looking at just about every way of raising money including the flotation of GMAC, the finance arm.

Most recent was the sale of the stake in Subaru to Toyota. Before that was the disposal of the stake in Fiat. There is only Suzuki and Isuzu left to go in the GM oddments box.

Actually, come to think of it, they might throw in Isuzu as well. GM’s 12% is worth only half a billion bucks at today’s share price. That would be all very neat and tidy Kirk. You get to be a very big fish in two Japanese companies while GM gets you out of the picture.

Suzuki results for the half-year announced this morning (Monday 31 October) were very tasty. Because of the huge success of the Swift, the company is expecting to top operating profit of 108 billion yen – a 20% increase on earlier estimates. Swift was a big exposure because of the huge commitment in manufacturing capacity in Hungary, Japan, India and China. Though still a small company in world terms, Suzuki is clearly getting the hang of building cars in the hot markets.

If Suzuki makes its numbers, it will be the sixth year in a row that it has set record earnings. Suzuki’s success echoes the demand for small cars seen by Daihatsu – the Toyota affiliate which has also lifted its profit forecasts.

With the partial exception of Nissan then, all the Japanese makers are on-song. Nissan’s problem is mainly because it has a big proportion of its activities in the US where marketing is currently the most difficult. Operating margins will still be around 8% though – double the best for European volume car makers.

Honda has raised its forecasts for the second time this year. Sales so far this financial year to March are 7% better than last year and the weak yen is enhancing profits. Toyota is giving similarly positive messages and expects new manufacturing capacity to bring an extra 9% of volume on stream next year – taking it comfortably to its destiny of world’s largest car maker – having long been the world’s most profitable and valuable.

Toyota is worth $162 billion at today’s share price – more than all the European car manufacturers put together and five times the size of Ford and GM combined. Those two companies have suddenly and extraordinarily become ranked at numbers nine and ten respectively in the list of the world’s top ten biggest car makers.

Rob Golding

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