By Tom Heysek

April closed on a slight downtick…midway through the trading week, the three major US stock markets closed about where they finished last week. The last trading day of April was framed by three news items, all released within a few hours of one another:

1. The Commerce Department released GDP growth for the first quarter, up 0.6%.
2. General Motors (GM: $23.29) reported a first quarter loss of $3.3 billion.
3. The Fed decreased the Fed Funds rate by one-quarter percentage point as widely expected to 2%.  

This modest gain in GDP, a little better than consensus growth estimates of 0.4%, was almost entirely the result of inventory accumulation and increased exports. Inventory build-up added 0.81 percentage points to the Q1 figure, having detracted 1.79 percentage points in Q4. That’s a swing of 2.5 percentage points, without which GDP would have been in negative territory.

Exports, driven by a cheaper dollar, increased 5.5%. Imports also increased but by a lesser 2.5%.

GM stated its Q1 loss was due to a weak U.S. market and a strike at an auto parts supplier that affected thirty GM plants. A bit more inspection reveals that excluding extraordinary items, GM’s loss was $350 million versus a $62 mm profit in last year’s Q1. However, U.S. losses were a stunning $812 million in Q1 versus losses of $208 million last year.

This means that GM’s non-U.S. operations earned $1.1 billion in Q1, a fourfold increase in OVERSEAS profitability. This overseas profit statistic is as stunning as the domestic loss. Overseas areas fueling GM’s growth have been referred to as the "BRIC" countries: Brazil, Russia, India and China.

Encouraging though it may be that GM and Ford (F: $8.09) have locked into the overseas earnings juggernaut, the financial reality is that these two companies pale in comparison to the other major auto companies in the global market, such as Toyota (TM: $101.78), Honda (HMC: $31.80) and Nissan (NSANY: $17.72).

NOTE: The ticker quotes for these Japanese auto makers are quotes for ADRs, American Depositary Receipts. ADRs are the U.S. equivalent of foreign-registered securities.

The ADR ticker quotes for Toyota and Nissan represent TWO shares of stock. Hence, buying one ADR for $101.78 in the U.S. is equivalent to owning two shares of Toyota in Japan.   

Here’s the ranking of each auto maker in terms of market value:

Independently, Toyota announced that its first quarter worldwide sales were 2.41 million vehicles. GM sold 2.25 million vehicles in Q1 making it official: Toyota is the largest auto maker in the world, replacing GM.

It is likely the Japanese auto makers are also benefiting from growth in the BRIC countries, especially China. People forget that from 1979 until the late 1990s China imposed a one-family, one-child policy. Non-compliance in those years ended a family’s political future, or worse. Those second children were shipped off to China’s interior provinces, and technically, did not exist.

There are as many as 300 million of these "kids" in China, now in their 20s. They’re leaving the farm, migrating to the cities, 13 million of them every year, for the next 20 years!

That’s a demographic equivalent to a new Metropolitan New York, annually. Surveys of Chinese in their 20s showed that after hiring a maid, buying a car was the #2 consumer preference.

Now I know the Olympics and unrest in Tibet have placed a real spotlight on China, and not all of it flattering.  For a really interesting take on this situation, and what it means for us investors, check out Robert Hsu's recent Asia.InvestorPlace.com article, "What’s Really Behind the Tibet Riots."

Looking beyond this year’s election, and placing China’s growth into perspective, the International Monetary Fund estimates China’s GDP is growing at 10% per annum, for at least the next 5 years. This means that China will have replaced the U.S. as the world’s largest economy by the time of the 2012 General Election.  Think overseas!

Guangshen Railway (GSH: $28.85) operates train services on the eastern coast of China, the destinations to which the China kids migrate. The company just reported a 192% increase in revenues to the U.S. $1.4 billion and U.S. $183 million in profit, almost double last year’s US$99 million in profit. This is a pretty good indication of its organic growth, and it appears to have little, if any, competition for either passengers or goods transportation.

CAREFUL: ADRs are not widely understood…and here is an example. The railroad has 7.1 billion shares issued. The ADRs each contain 50 shares of stock. Therefore, each ADR, at $28.85 per ADR, is in fact equal to 50 shares of GSH stock at about $0.58 per share.

Stating this another way: you could buy 100 shares of this Chinese company on the NYSE for about $58 (2 ADRs x $28.85), plus commissions.

Given that GSH is a foreign company, let’s put it into perspective with more familiar names. GSH is a mid-cap company, with a market value of almost $4 billion. With annual revenues of $1.4 billion, this equates to a Price-to-Sales ratio of 2.85.

Let’s compare these numbers to two well-known US railroads, CSX (CSX: $61.94) and Norfolk Southern (NSC: $59.58). Hmmm.

The Price-to-Sales ratios are 2.4 for CSX and 2.3 for Norfolk, not that different than GSH. Using a more familiar measurement, Price-Earnings Ratio (P/E), CSX’s was 18, and Norfolk, 16. GSH had $183 million in earnings last year. With 7.1 billion shares outstanding, that’s $0.03 per share. Recent GSH price: 58 cents, or, a P/E of 19.

Sector shift is well-underway. Earlier, we pointed out that Apple (AAPL: $179.22) had now surpassed Citigroup (C: $25.27) in terms of market value, and that this appears to be a long term shift in relative valuation. The next Sector Shift in the mobile technology arena: Research in Motion (RIMM: $121.63) with a market value of $68 billion to overtake Goldman Sachs (GS: $191.37) with a market value of $75 billion.

As the graph following shows, this Sector Shift appears inevitable.

Making this possible, of course, is that both Apple’s iPhone and Research’s Blackberry are products people are demanding. Click here for a useful survey Changewave did with respect to these products.

Credit card scams! Check it out—cool video!

Snippets

Microsoft founder Bill Gates and Yahoo’s President, Sue Decker will be in Nebraska this weekend at Warren Buffet's annual event to kick off the Berkshire Hathaway 2008 shareholders’ meeting in Omaha. With Microsoft stalled and still months away from closing on the purchase of Yahoo, and with Yahoo looking for more money, perhaps the two will seek out the Oracle of Omaha to referee a deal!

Berkshire Hathaway (BRKA: $133,850.00) plans to acquire Wm. Wriggly Co. (WWY: $76.16) for $80 a share. WWY closed up $14.50 for the week, up 23%.

CHEAP STOCKS DEPARTMENT: Unisys (UIS: $4.16) reported a loss in Q1 of 7 cents per share…nevertheless, consensus earnings estimates call for $0.25 per share earnings in 2008. This outlook is largely overseas driven.  Unisys has the contract to provide systems, software and security for Terminal 3 at the Beijing Capital International Airport (BCIA). BCIA became fully operational March 26th; Terminal 3 is now the world’s largest airport terminal building, and will be central for transportation during the 2008 Summer Olympics.  Unisys has been working on this since 2005.

Successful launch and opening of BCIA confirms that Unisys’ proprietary software and systems technologies work! Unisys is therefore well-positioned to be a dominant corporate factor in providing systems services to China’s burgeoning economy in general, and to its transportation sector in particular.