Bailout’s Best Bets, Or Indebted Duds?

Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In 2008, the bottom fell out. When that bottom fell out, some of America’s best and brightest no-brainer investments hit rock bottom, too. Like debt-addicted junkies, the leaders of these one-time A+-rated companies slouched to Washington D.C., top hat in hand, to beg for money from the American people.  After nearly five years, signs of life are starting to emerge in the economy. Many of the companies are starting to throw off the shackles of debt and tarnished reputations, and are telling investors that they are worthy of their investment money once again.

There are two schools of thought about this. One, ironically, is that the bailout may be a competitive advantage for these companies, allowing them to reinvest and diminish their debt load, unlike other firms that have to do that the old fashioned way -- by earning money. Skeptics say that these companies won’t attain their former high-flying altitudes because easy money breeds bad financial behavior, and a muddied reputation will never turn golden again.

In this article, we’ll take a look at three of these companies -- and a few competitors as reference points -- that are either bailout beauties or indebted duds.

Government Motors?

General Motors (NYSE: GM) became the poster child of the bailout and of American corporate largess. Much of the taxpayer anger focused on the billions that rushed to save the one-time bulletproof maker of some of America’s favorite cars, trucks, and SUVs. Those detractors  nicknamed the company “Government Motors.”  Regrettably, these taxpayers are the same people who buy GM cars and invest in its stock.

In the past year, GM's stock is up about 8 percent. It’s still about 15 percent under its all-time high after the bailout, but earnings appear to have stabilized.  Earnings Per Share (EPS) has risen sharply from $2.65 to $4.27 at the end of 2011. This is after GM took its EPS for a wild test drive, swinging from a negative EPS of -$52 in 2008 to $24 in 2009. Meanwhile, the price-to-earnings (P/E) is a respectable 11, and company officials are quietly optimistic of hitting their goals for the next few years, according to several reports.

Let’s look at a competitor -- non-bailed out bum Ford (NYSE: F). Ford is up $2.29 over the past year, a climb of more than 20 percent. It’s trading near its 52-week high of $14.07.  Its EPS is also rising strongly, from $1.94 in 2010 to $4.95 in 2011.  Meanwhile, it’s P/E is at an incredibly low 3.17.

Banking On Bailed Out

Besides the automotive industry that got caught with a lot of bad debt on their balance sheets in the mid-2000’s, banks and investment bankers were nearly sunk by the credit squeeze, prompting government intervention.  Goldman Sachs (NYSE: GS) received a multi-billion dollar bailout from the government, like most financial firms in 2008. Those were dark times for “Golden Slacks;” the company’s stock once reached the $200 a share level, but fell a staggering $150.  However, the stock appears to be heading back to those lofty heights. It’s climbed 38 percent just this year.

That’s the good news. Here’s the bad news: the company’s EPS has fallen from $15 a share to $4 a share. In 2009, the EPS was at $22, which was a huge boost from the year before when the company had a negative EPS of -$2. Revenue and operating income has slowly declined over the past four years.  Goldman Sachs' P/E is 13.

Let’s take a look at a competitor. JP Morgan Chase (NYSE: JPM) has a rising EPS, from $3.96 in 2009 to $4.48 in 2011, which is way up from .89 in 2009.   It’s stock has climbed 28 percent last year and is now over $46 a share.  JP Morgan’s P/E is 9.8

Is AIG The Comeback Kid?

Finally, AIG (NYSE: AIG) may be the one company in the list of bailout recipients that came closest to sinking the the entire economy.  It lost multiple-billion dollars and was gushing money so fast that the insurer looked as though it would be scuttled.  It was only months prior to the crash that AIG was regularly priced above the $1,000-a-share mark--quite an elite club.

Over the last year, AIG is far, far, from those types of valuations, but it did rise almost 40 percent. Right now, it’s up to $34 a share, $9 higher than a year ago. It’s EPS growth -- or drops -- have fluctuated so wildly in the past few years that it’s hard to make an assessment, but it appears to be on the rebound.

At least it’s out of the deep negative territory.  In 2011, the EPS was set at $9.67, while the year before it popped to - $72.30. In 2009, AIG had a negative EPS of -87.77 and... hold onto your minus signs... -$700 a year prior to that.  The P/E is incredibly low, sitting at 2.43, but that may be due to the historic pressure the stock has been under, rather than an accurate assessment of its valuations.


mlswayne has no position in any stocks mentioned. The Motley Fool recommends American International Group, Ford, General Motors, and Goldman Sachs. The Motley Fool owns shares of American International Group, Ford, and JPMorgan Chase & Co. and has the following options: Long Jan 2014 $25 Calls on American International Group. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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