Should You Dump Delphi?

More than a million individual investors hold stock in General Motors. Soon, they'll also own shares in GM's parts maker, Delphi Automotive Systems. On May 28, when GM finishes the spin-off of Delphi it began with a Feb. 5 initial public offering, Delphi shares worth $11 billion will be floating in portfolios big and small, including Ray Dube's. "I don't know whether to sell it, hold it, or what," he told me not long ago. "I haven't got the foggiest."

Dube spent 25 years as a stockbroker and now, retired in suburban Detroit, he has 1,000 GM shares. So you might expect him to be a little less, well, clueless. But the reality is, all the spin-offs, carve-outs, and mergers that have affected so many stocks add up to one monster headache for investors, pro and amateur alike. Everyone wonders, "What do I do now?"

I'm optimistic about Delphi, and I'll explain why shortly. But for the million GM holders, there's no single, simple answer. For one thing, until after the spin-off, you won't know two crucial numbers: your tax basis in both GM and Delphi. Figuring it is an onerous task, but one you'll find a little easier with a worksheet GM aims to issue in early June. To begin mulling the right move for you, you can start with these two questions:

Why do I own GM? If your answer is "the dividend," then dump your Delphi and buy more GM. It figures to yield about 3%, more than twice Delphi and with better prospects for dividend growth as Delphi uses lots of near-term cash flow to build its pension reserve.

What if you own GM because you think the world's largest auto maker has at last turned the corner? You've had lots of company lately, with the stock doubling from a low last fall to nearly $95 in May, before tailing off to $83. If you've kept the faith, you'll want to sell Delphi and buy GM. Delphi still does 80% of its business with GM, but as time goes on, that tie will weaken. If you're in GM for GM, better to pile up your money there.

But what if you bought GM as a cheap way to play autos? Then sell GM and buy more Delphi, which offers more and growing diversification. Last year, it had $6.2 billion in sales to other carmakers, notably DaimlerChrysler, Toyota Motor, and Fiat. CEO J.T. Battenberg III told me he sees non-GM sales this year and next outpacing those to GM, eventually growing by 15% a year.

When do I need my money back? If your answer is "soon," as in before Labor Day, sell Delphi. Its outlook is clouded by contracts expiring this fall with its two principal labor unions. More immediately, Delphi shares are likely to suffer "selling pressure," in Wall Street's euphemism. "A lot of funds own GM but don't want the Delphi piece," says Joseph Cornell, president of Spin-Off Advisors, a Chicago research boutique. "That stock will have to find permanent hands," a sorting-out process that could last six months.

Maybe, though, you don't need your money back soon, and near-term market turbulence matters little. You can calmly hold Delphi--or even buy more on any summertime dips. You can give Battenberg time to enact his plan for better labor relations and productivity, plus higher non-GM sales and profits.

What if you don't own GM, yet are intrigued? Many pros tilt to GM, whose turnaround is further along, its payoff nearer. But amateurs don't have to fret over quarterly returns. We can afford to wait for what may prove a better bet.

Look past Delphi's labor talks and the clouds hanging over trading in the stock. What you'll see is a little-known global leader going cheap (table). At 0.4 times its $28 billion in sales, Delphi is priced at less than half the multiple rivals are getting in mergers--a gap that spells value.

True, at twice the size of its nearest competitor, Delphi lumbers along as an unlikely merger target. Yet Delphi isn't shy about selling pieces of itself: In recent years, it has put units with a total of $6 billion in sales on the block. Better yet, if Delphi can meet its goal of expanding its net income margin by half a percentage point a year, from about 3.6% this year to 5% in 2002, the value inherent in sales of $28 billion will become obvious. "There's a tremendous upside for Delphi," Battenberg said. If he doesn't exploit it, someone else will.

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