Crony Capitals
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What do Sacramento, Calif., Hartford, Conn. and Washington, DC have in common? They are three seats of government that practice crony capitalism. Some businesses flourish when the government gets involved. However, most do not. In many cases, nobody wins. One example lies in the government's decision to "invest" in energy.
Much has been written and said about Solyndra. The company specialized in developing solar panels using relatively expensive photo-voltaic technology. The company received a $535 million federal loan guarantee in 2009 as part of an Energy Dept. program begun during the Bush administration and which continues today. When the price of bulk silicon dropped, Solyndra could not compete with the more traditional solar panel companies which are primarily located in China, and it filed for Chapter 11 bankruptcy protection last year. All of the employees lost their jobs. Many are filing lawsuits against the company. The loan will probably not be paid back. It was not a good investment for the American taxpayer.
Instead of investing in solar a better play in energy would have been to cash in on the North American oil and natural gas boom. Enterprise Product Partners LP (NYSE: EPD), a master limited partnership in the storage and transportation industry, is one company to consider. It sports a nice dividend yield of 4.8% and earnings are increasing, in fact they were up 31% last quarter as the company has reduced its operating expenses significantly. It has evolved into one of the biggest pipeline companies after merging with Teppco Partners L.P in 2009.
The federal government decided to get into the auto business too.
General Motors Corp. (NYSE: GM) was once the world’s biggest auto manufacturer and most valuable company on earth. However, fortunes changed and the company was forced to file for Chapter 11 protection. It reorganized and issued stock through an IPO about 2 years ago. GM received help from the government in the form of a direct $50 billion federal “bail-out” and a $45 billion tax credit against future profits. Last year the company received a $110 million refund even though it made a “profit” of $7.6 billion.
The U.S. taxpayers now own 26% of GM's stock. How is that working out? Not so well. The stock has shed about 40% over the last 2 years (the S&P500 gained about 20% over the same period). The company recently posted a quarterly loss and its market share in the U.S. is declining. A recent announcement indicated that production of the “innovative” electric vehicle, the Chevy Volt, will be suspended for a few weeks due to poor sales, idling several thousand workers. This is the second such halt this year.
The federal government also “invested” in another auto maker, Chrysler Corp. That didn’t work out very well either. Chrysler ended up being merged into the Italian car company Fiat. Things are not going great for Fiat. The company just announced a loss for the fiscal quarter ending June 30th.
Ford Motor Company (NYSE: F) may have been a better investment in the U.S. auto industry. The company has plenty of free cash flow ($5.5 billion), its earnings increased by 10% from 2010 to 2011 and it has started paying a dividend again. It didn't require a bail-out or bankruptcy protection, although it was hurt by the financial crisis as GM was.
It appears that a state government is getting into the auto parts business.
After the election of Dannel P. Malloy as governor in 2010, Connecticut has engaged in the practice of offering companies incentives to move to or stay in the state. It recently approved a $5 million loan to Advanced Auto Parts (NYSE: AAP) which will open a distribution center and “create 100 to 200 jobs” according to the official announcement. That’s $12,500 to $25,000 per job. Advanced Auto has a $5.25 billion market cap. Earnings per share have doubled over the last 4 years to $5.21. Free cash flow increased to over $542 million last year. I don’t think they really needed the money from the state.
Connecticut also engaged a private organization, Jackson Labs, to establish a medical research center in Connecticut. The price tag of $291 million includes a $191 million loan guarantee. The benefit according to the state will be the creation of “up to 300 jobs over the next ten years.” That’s $97,000 per job per year on average. Looks like a good deal for Jackson although maybe not for the typical state resident who makes less than $60,000 per year. Connecticut recently raised taxes across the board in order to address a budget deficit.
California is a mess. The budget deficit is huge. State employees have lost their jobs. Services have been cut. Inmates are being let out of prisons. The public employee pension fund is significantly underfunded and may need a taxpayer funded bail-out.
However, this still doesn’t stop the government from spending and proposing new programs to invest in. The state wants to take over pensions of companies in the private sector. One legislator stated “we can do a better job of managing them”.
California, backed by the federal government, wants to build high speed rail between Los Angeles and San Francisco. The estimated cost for construction is approaching $91 billion. Who will pay for this? What will the benefits be? It will actually cost more to take a train than fly between the cities. It doesn’t seem like a sound investment.
I know that government has a place in our lives today. Defense, national security, and regulation of the banking and financial system are all important functions. However, I don’t believe that investing is one of the strong points of our elected officials. That is best left to the private sector. Let us make our own mistakes and reap our own rewards.
Mathman6577 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Enterprise Products Partners L.P., Ford, and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
