Auto stocks plunge - but are they cheap?

By Walden Siew and David Bailey - Analysis

NEW YORK/DETROIT (Reuters) - General Motors Corp GM.N shares are at their lowest level since 1954 and its benchmark bonds yield 15 percent compared with the 10-year Treasury's 4 percent yield, but it's not necessarily cheap, investors say.

Whether GM and its smaller rival Ford Motor Co (F.N) represent value to investors and creditors at these levels depends, in part, on whether industry-wide U.S. auto sales are near bottom in their third year of decline.

But after sales tumbled to their lowest level in 15 years in June, no analyst is yet making that call. That leaves only high-risk, high-stakes investors to place their bets in a U.S. auto industry burdened with high oil and commodity prices and a costly consumer defection away from trucks and SUVs.

A bond investor would be handsomely rewarded if GM and Ford merely steer clear of the abyss of default, and would reap a rich yield in interest payments while waiting for their junk bonds to rise. But a stock reward could be much farther down the road, and an investment wiped out if the carmaker falls into bankruptcy.

The risk of an even deeper downturn in the U.S. auto market and the prospect GM could be forced to raise up to $15 billion in new capital also make the stock a risky proposition, but its bonds could attract interest from some junk bond and distressed debt, or vulture, investors.

Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, said he holds an underweight position in GM and Ford bonds, but would not be a buyer at this point.

"No one is just getting out of the names, but no one is going to overweight the names," Mikelic said.

The myriad pressures on the top and bottom lines for the automakers, and the U.S. economic slowdown, have made it hard to discern a value in the stocks and bonds.

"There's always value somewhere," said Andrew Feltus, portfolio manager at Pioneer Investments in Boston where he oversees $8 billion in high-yield assets. "We're definitely following the story closer as there is a lot of yield relative to the rest of the market."

"The price is right," said Feltus, who hasn't bought auto bonds yet, preferring their finance units. "It's more about comfort with their balance sheets."

Automakers and analysts had predicted a second half recovery in U.S. auto sales near the start of 2008, but those hopes have vanished under progressively worse monthly sales reports since spring. Now some are predicting that 2009 could be even worse.

GM shares have been volatile amid a steep downturn over the past two months. GM shares rallied as much as 15 percent on a June sales report on Tuesday, only to drop 15 percent on Wednesday after Merrill Lynch warned bankruptcy was "not impossible."

GM - THE DOG OF THE DOW

GM has been the worst performer in the Dow Jones industrial average .DJI for the first half of 2008. The stock has fallen 67 percent since May 2005, when it lost its investment-grade rating.

Meanwhile, GM's 8.375 percent bond due in 2033 traded at about 80 cents on the dollar in May 2005. The bonds have since plummeted to trade at a record low of 57 cents, enticing investors with yields of 15 percent when the 30-year Treasury bond yield is 4.51 percent.