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On A Clear Day, You Can See An Upswing At Gm

On A Clear Day, You Can See An Upswing At Gm

Since last autumn, investment manager Tony Hitschler has seen his portfolio of little-known, out-of-favor issues with depressed price-earnings ratios take flight. Now, a generally disdained but highly visible giant tops his shopping list: General Motors.

On Feb. 4, the nation's largest auto maker cut its quarterly dividend from 75~ a share to 40~ and slashed capital spending plans by a half-billion dollars a year over the next three years. Analysts had anticipated some cost-cutting by the industry because of the recession, but even so, many put out "sell" or "avoid" recommendations on GM after the dividend cut. They also lowered their 1991 earnings estimates. One analyst reduced his to a loss of $2.50 a share, vs. an earlier loss estimate of 50~. A more bullish analyst cut his estimate from $4.50 to $1.50. For 1990, GM is expected to post a loss of 20~ to 39~ a share because of a big charge in the fourth quarter related to plant closings. In 1989, GM earned $6.11 a share.

But Hitschler takes a contrarian view. "Based on valuation measures that we respect, GM is a very cheap buy right now," says Hitschler, president of Brandywine Asset Management, which shepherds nearly $1 billion. Although some analysts contend that GM's stock tends to fall sharply after a dividend cut, Hitschler insists that this time, GM will snap back from its current 35, possibly reaching its 52-week high of 50 1/2. Given "several factors we see ahead," he adds, "GM could come near its book value of $61 a share in the next 12 to 18 months."

MARGIN WATCH. Hitschler says the most valid timing tool he uses for GM is the company's pretax profits as a percent of sales. When pretax margins collapse, says Hitschler, the stock drops to very attractive levels. Pretax margins have declined almost to zero, pulling the stock close to its 52-week low. Hitschler recalls that during 1981-82, GM's pretax margins did fall to zero. The stock hit a low of 16, but by 1984, when pretax margins had climbed up to 6.5%, the stock had risen to 41. When pretax margins slipped to 4% in late 1986, the stock fell back to 32. In 1988, GM's pretax margins were up again, and the stock rose as well, reaching 50 the following year.

Hitschler thinks GM's margins will show a dramatic improvement next year because of sweeping cost-cutting and the attractive line of new cars it has in the pipeline. Another important reason for Hitschler's bullishness is the Federal Reserve Board's aggressive cutting of interest rates in recent weeks. As rates move lower, he notes, consumers start buying cars.