General Motors’ master plan has merit but deserves scrutiny

Things have been changing in a big way at General Motors (NYSE: GM). CEO Dan Akerson and his team have been paying attention to how Ford has turned itself around, and that’s a good thing.

GM is aiming to reduce its number of models sold around the world and build them on the smallest possible number of “platforms,” industry-speak for a set of common dimensions and parts that can be shared among different models to lower costs and streamline production. Mary Barra, GM’s new product chief, expects that by 2018, the company will be building 90 percent of its vehicles on just 14 global platforms, down from today’s 30 or so.

That should result in better, more competitive products, which can be sold at higher prices with fewer of those margin-killing “cash back” incentive campaigns. And that means strong sales and greater margins. Add in strict cost controls, and the result is solid, sustainable profits.

The trick will be in the execution. It’s one thing for GM managers to lay out a sensible plan and another to get GM’s cumbersome bureaucracy to play along. It’ll take some time before we know how well this revamp is going to work out in practice, and continued skepticism may well be warranted. (The Motley Fool owns shares of Ford, and its newsletter services have recommended General Motors and Ford.)

Ask the Fool

Q: What does “split-adjusted” mean? – N.H., Santa Maria, Calif.

A: It reflects a stock price that has been changed to account for stock splits that have occurred over time.

Consider Coca-Cola. It went public in 1919 at $40 per share and has split its stock 10 times since then. Its stock price has recently been trading for around $67 per share. So have the shares appreciated by only $25 since 1919? Far from it. Remember the effects of splitting. With each split, you end up with more shares, worth proportionately less. (A 2-for-1 split, for example, gives you twice as many shares, each worth half as much.)

Thanks to splits, one 1919 $40 share of Coca-Cola has now become 4,608 shares. If the stock had never split, each share would be worth around $300,000, and few people could afford to buy even one! (That price reflects dividends that were paid regularly over the years.)

You’ll see the term “split-adjusted” when reviewing historical stock prices. For example, in August 1970, Coke’s stock price was roughly $0.49, adjusted for splits and dividends. The price was actually around $72 per share then, but to compare it with today’s price, you need to adjust the price for splits that occurred between then and now. That way, you can tell at a glance that Coke’s shares haven’t fallen from $72 to $67 since 1970, but instead have risen from the equivalent of roughly $0.49 to $65 – a 130-fold increase.

Q: What’s business “shrinkage”? – T.R., Hickory, N.C.

A: It’s the routine loss of inventory, such as through accidental breakage or theft. Shoplifting, for example, shrinks many retailers’ profits significantly, and retailers make allowances for shrinkage in their plans and reports.

My dumbest investment

My dumbest mistake was to sell my Google shares. I had only about six and they were priced way below $100. I instead bought shares of a Canadian search-engine company, due to its low price. Now I am kicking myself for the stupid move, as Google went way up and the other company tanked. Lesson learned. – O.L., online

The Fool responds: You may have made the common mistake of thinking that a $100 stock is more “expensive” than, say, a $50 stock. Never evaluate a stock price just on its own. You need to compare it to earnings, or revenue, or some other numbers, to get some meaning out of it.

That Google price, for instance, has proven to have been cheap, as shares trade above $500 now. You might look for a low price-to-earnings (P/E) ratio, or better still, a low P/E paired with strong revenue and earnings growth rates. The more factors you evaluate, the better. And be sure to assess a company’s competitive advantages and growth potential, too. Some stocks are really cheap because the company is in trouble.