• Oct 22nd 2010 at 1:30PM
  • 35
After next month's elections, General Motors will rev up its engines to go on the road and try and sell its initial public offering of common stock to savvy investors, especially the big institutional investors with millions of dollars, hundreds of millions in some cases, to put into a stock they like.

So, is the new GM a buy? Let's look at some facts. It has had four CEOs since Spring 2009. It has gone into and come out of Bankruptcy. And it's current chairman, Edward Whitacre Jr., tapped by the White House because of his extraordinary history of management and corporate governance, apparently is so checked out already, despite the fact that he has the job until the New Year, that he yammered to a reporter about details of GM's stock plans despite the fact that the company is in a Securities and Exchange Commission-imposed "quiet period." Oops.

"It's a little too early to say, but it is going to be somewhere in the $20 range ...$20 to $25, something like that would be my guess," Whitacre told Reuters. Reuters also quoted Whitacre as saying, "I can't say how much we'll sell, but I can say we'll have a successful IPO sometime in November." GM has had to distance itself from the comments of its own chairman.

While these facts don't necessarily inspire confidence, hold your judgement. Stock market investing can be an emotional game, especially for amateur individual investors. But it pays to look at stocks and the future with a more unemotional view.

Continue reading...
How many amateurs bought shares in, say, auto parts companies like TRW or ArvinMeritor in the Spring of 2009 when the auto and parts companies looked headed over a cliff like crazed sheep. Very few. If they had, though, they would be cashing in gains today of 500% and 1300% respectively. Even Tesla Motors, which is more hype than reality to most informed observers, has seen a 15.5% gain since its IPO last June. Ford, since May 2009, has gained 140%.

Tesla aside, those who jumped into auto parts in early 2009 knew that short of bankruptcy these well-run companies would bounce back when auto sales bounced back.

GM logoAnd here is where it should get unemotional no matter how an investor may feel about government bailouts, whether the Chevy Volt is an innovation or a high-priced golf cart. The U.S.A runs on cars. We are a car culture. Say what you want about how much we need high-speed rail, we are drivers. The U.S. will probably sell about 11.7 million vehicles this year, which is lower than the 12.5 million rate at which we scrap vehicles. As vehicles people are holding on to longer than they want break down, the scrappage and sales rate will likely go up. By 2015, it is not unreasonable that we will see a selling rate that crowds 14 million to 15 million new vehicles a year.

GM, even with the way many people view its tax-payer ownership, is making decent money now at today's selling rate. That's right. As tough as things are now, GM is making good money. GM's debt has gone from $94.7 billion before bankruptcy to $17 billion. That's less than half of Ford's comparable debt. GM has cut its annual operating costs by $10.7 billion a year. It's market share has only dropped from 21% a year ago to 18% through September, despite shedding four of its brands – Hummer, Pontiac, Saturn and Saab.

Never mind how many Americans feel about GM. Consider that GM has a dominant position not only in the U.S., but in China, the fastest growing market in the world. And it will top 2 million in sales this year in a market that will be around 16 million-plus. GM is still the leader overall in pickup trucks in North America by virtue of adding up sales of Chevy and GMC branded trucks. Toyota and Nissan haven't been able to make a dent in that highly profitable category. As the economy comes back, and housing picks up again in the next few years, the light truck market will still be dominated by Ford and GM, with GM having the bigger market share.

The economies of the auto industry can be confounding. Sure GM lost tens of billions. But that was in large part because of the following math. Too many factories + too many lousy brands + too many employees making too much salary + too many rebates + too many mediocre cars = big losses. Here is another piece of the business. When a plant is only operating at only about 70-percent capacity you have losses. It varies by company, but break-even for a given plant might be when it is operating at 75-80% of capacity. Above that level, and the plant becomes like a printing press in a hurry. The profits mount fast.

GM is poised to make big profits in the next few years as we continue our addiction to driving.
Bottom line: The Chevy and Cadillac product lines have become top-drawer for the most part and getting far more consideration in a poor economy, combined with the weakness of Chrysler and the recall travails of Toyota. GMC has always been a profitable brand. And Buick is climbing despite the middling response from the automotive media to the new Buick Regal. The debt is incredibly low for a company with such big revenues and cash flow. And GM is getting back into the loan making business, which will make it easier for buyers to get credit. Some estimate GM has lost more than a point of market share because it can't get legitimate buyers qualified for credit at outside financial institutions.

In other words, GM is poised to make big profits in the next few years as we continue our addiction to driving. The cars we purchased in big numbers seven, eight and nine years ago are getting closer to 150,000 miles, and they will have to be replaced in larger numbers than is currently the case. Eighteen-percent of them, and possibly more, will be GM vehicles.

Before jumping in to GM's new stock when it becomes available, look coldly at the numbers and the company's prospects for making money, rather than how you might feel about tax-payer bailouts. You may still decide to pass on GM stock. But at least you won't say that you should've at least investigated.


David Kiley, an award winning journalist, covers the auto industry from Ann Arbor, MI. He has followed the industry for 25 years, and held posts including Detroit Bureau Chief for USA Today and senior correspondent for BusinessWeek. He is also the author of two books on the industry: Getting The Bugs Out: The Rise, Fall and Comeback of Volkswagen in America [John Wiley and Sons 2001], and Driven: Inside BMW, The Most Admired Car Company in the World [Wiley, 2004].

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    • 1 Second Ago
      • 4 Years Ago
      "And it's current chairman, Edward Whitacre Jr., tapped by the White House because of his extraordinary history of management and corporate governance, apparently is so checked out already, despite the fact that he has the job until the New Year, that he yammered to a reporter about details of GM's stock plans despite the fact that the company is in a Securities and Exchange Commission-imposed "quiet period." Oops."

      I understand this is a blog and everything but cant we do better than this? What a horrific sentence.
      • 4 Years Ago
      GM has no track record at this time and when they finaily pay off the Goverment loans and they are on there own and the public can see how they are going to run there company without anyones input then you may want to buy there stock. It still bothers me that they burned there empoyees from the top to the bottom. Which they also burned alot of small companys ,which are know out of business. As far as Fords debt , I believe they are on track with having it paid off with interest on time. As I believe Gm just moved assets around to show they have paid on there loans ,I could be wrong. I would not buy and would wait a least two years.
      • 4 Years Ago
      Hopefully the tag Government Motors will be history.
        • 4 Years Ago
        Wouldn't hold my breath if I were you... People aren't gonna forget about that for a while
      • 4 Years Ago
      I would buy some, just because I feel it will most likely pick up once the economy gets moving again. With that said, I wouldn't invest heavily in it. I just can't see it ever being something the stockholders would get filthy rich off of. It's not going to be the next Apple or whatever.
      • 4 Years Ago
      It's still wildly speculative, so I wouldn't invest. In any case though, they are in much better financial shape than popular opinion might dictate.
      • 4 Years Ago
      I think that the desire to not miss this train like many missed the Ford train is going to overinflate GM's stock price.

      With Ford hovering around the $14/share mark, I fail to see how GM is going to command such a substantial premium.
        • 4 Years Ago
        GM's share price compared to Ford's share price has no bearing on whether or not it's a good value. Ford could do a reverse split and make their stock valued at $50/share which doesn't affect total market cap or P/E ratio.
        • 4 Years Ago
        Ford has a LOT more debt than GM has now.

        Fords product lineup is indeed a notch above GMs, even though they have recently made some questionable decisions as well. It's an amazing feat how quickly Ford has overtaken GM (and all the others) in the powertrain department, though. In the end it is about what is selling and that may not always be the best product. Camaros are still selling at or above Mustang numbers even with their new engine line-up. Same with the Camry selling at least +60% more than the Fusion.
        • 4 Years Ago
        @ Scorch:

        GM isn't up to their eyeballs in Government debt. They paid back the loans and the rest that they owe is stock in the company that will be sold off once the IPO happens.

        Again, as mentioned in the story, GM has debts of $17B which is less than half of what Ford's debts are.

        As much as people don't want to admit it, GM is in a pretty strong position for the future. Bankruptcy allowed them to shed tons of cost and debt. They've revamped their salary/benefit packages to make them competitive, they've been on a charge to bring out highly competitive vehicles in every market, which they have largely accomplished as well. Ford's recent gains aside, GM will be making profits for a good while I foresee.
        • 4 Years Ago
        I think you're right about the bandwagon effect. The difference is I believe Ford has better management, better product line up, and isn't up to their eyeballs in government debt. And it's cheaper and may resume its dividend in the future.

        GM is going to be a tough sell.
        • 4 Years Ago
        @AB Ho

        Thank you, the price of a share has very little relation to the value of a company. I think AutoBlog needs to come out and explain this to everyone so I don't keep reading the same "Well Ford is only at $14 so WTF?" comment. (No offense to RG as he's certainly not the first or last to make that mistake)
        • 4 Years Ago
        GM has a higher market share, a stronger presence in Asia, and far less debt than Ford. It's stock will be far more valuable than Ford.
        • 4 Years Ago
        "Ford has a LOT more debt than GM has now."

        Ford plans to retire the bulk of that debt by the end of 2011.

        GM stock is very speculative. I understand their business reasons for wanting to pay off the government as soon as possible -- the whole "Government Motors" pejorative undoubtedly hurts business. But I have to say that this IPO seems premature. If they had put together a couple profitable years, with growing market share, more highly rated models, etc., then I could see it. But GM still has a lot of work to do.
      • 4 Years Ago
      Here's where I see GM stock as an investing option:
      Mid-term: As David indicates, GM's financials are currently healthy, sales have been rising, they have a strong peice in developing markets, and they are rid of much of the operational "burden" that now resides with the Motors Liquidation co.. The stock will likely reflect this in a positive manner.
      Long-term: I'd have a lot more questions about the long term financial health of the company. China's boom will not last forever, and while they have strong products, they don't have "market-dominating products" like the Camry has been. This is where we'll see if the restructuring allowed for a real improvement in strategy or just a coat of spit-polish.
      Short-term: GM's IPO will be one of the largest in recent history, has more than its fair share of press, and will no-doubt get plenty of "emotional" investors. Prices will likely be inflated out of the gate. The question is, how long will they stay that way? The prices WILL correct themselves downwards, bottom out and then regain value to a steady-state, which will probably land below the IPO price. The folks with the best pulse on the market may be able to grab their shares in that trough, but it'll be a small window. Everyone else will either grab it at IPO price or after it steadies out and cross their fingers that the mid-term prospects are actually as good as the financials look. Or they can gamble on the company's long-term strategy... operative word being "gamble".

      • 4 Years Ago
      This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone. I appreciate the concern which is been rose. The things need tobe sorted out because it is about the individual but it can be with everyone.The above thought is smart and doesn’t require any further addition.It’s perfect thought from my side.A very smart and diplomatic answer. It’s really appreciable and general.
      cheap cars
      • 4 Years Ago
      I predict at the start it'll jump up sharply in price, be a money grab for insiders, union pension funds, and for those with political clout. Many of those will jump out with a tidy profit and the suckers (everyone else) will be left with what they started with, at best.
        • 4 Years Ago
        Possibly, if you are in it for a ST play. What you have to do is take the present value of all future corporate profits to get a fair share price that will be irrelevant to short term plays.
      • 4 Years Ago
      Ford (NYSE:F) is the ONLY american car company worth investing in at the moment.
      • 4 Years Ago
      Let's review.
      the UAW still has the company by the nuts.
      Compounded now, Obama gave the Union a huge chunk of the company and now they can really run the company into the ground.

      GM still has huge depts they can't pay. The retirement obligations alone make the company a NO BUY!

      GM should have gone through a regular bankruptcy, shed the bad seed polluting the company, and perhaps become a viable company again.

        • 4 Years Ago
        SeaUrchin said, "The issue is that they still have the same product. Volt is not a money maker, so it is a non issue."

        GM products are getting significantly better with each iteration. Some of the competition is too, but others, such as Honda and Toyota, are not. I know you hate GM, but even you must be able to see this - you've been on AB for too long to not agree.

        Having said that, as someone with a 7 figure stock portfolio (and who drives a Pontiac), I won't be buying ANY automaker's shares in the foreseeable future. This industry, IMO, is too competitive. Good for car buyers, but bad for corporate profits. Oh, and the Chinese are eventually coming. And you thought Japan Inc was bad...
        • 4 Years Ago
        Hey no one cares what you think!

        This will be well worth the investment.. mark my words!
        • 4 Years Ago
        "Is the new GM a buy?"

        Despite the attempts of GM cronies and fanboys alike to put a positive spin on this one, the following facts remain:

        1) GM management personnel may have changed, but the old GM corporate culture (which is a contributing factor to their current predicament) remains in place.

        2) The UAW (another entity that was a contributing factor to the current GM predicament) has a substantial stake in the company

        3) GM engineering consistently hamstrung by the bean-counters - effecting the actual product.

        3) TARP (a.k.a. "bailout") was a very expensive band-aid which still doesn't address the core problems within GM (see 1, 2 and 3).

        So until there is an honest (realistic) effort to address these issues, I wouldn't buy GM stock with Monopoly money, much less - real money...
        • 4 Years Ago
        the company has a long track record of not making profit.
        • 4 Years Ago

        3) GM engineering consistently hamstrung by the bean-counters - affecting the actual product.

        4) TARP (a.k.a. "bailout") was a very expensive band-aid which still doesn't address the core problems within GM (see 1, 2 and 3).
        • 4 Years Ago
        sportsbike80 does not know what he is talking about. I am guessing that the number in his name refers to his IQ. And he is the genius of the family...
        • 4 Years Ago
        The issue is that they still have the same product. Volt is not a money maker, so it is a non issue.

        The rest of the line up is what matters, Malibu is offered with 2K discount on the website, that is before you even start talking to the dealer. Plus the segment has 2 new cars, Sonata and is Kia sister. We will get a new Camry soon as well.

        Cruze will have to fight with Civic, Corolla, new Elantra and now a brand new Focus as well, so this is also a very competitive segment.

        Also, in a recent Motor Trend comparison a much newer GMC Terrain lost to Rav4 and CRV, which are much older.

        Camaro will need updates to stay competitive with a Mustang, for 2011 we are basically getting EXACTLY the same Camaro we had last year, so this year sales probably will be lower.

        At the end the product is what sells, GM will have to come up with something fresh and they will have to continuously improve it.

      • 4 Years Ago
      With "GM" trying to 're-invent' itself, it's also going through an 'identy crises' !
      Rather than try to come up with 'new gimmicks'... they better stick to what
      is 'tried & true'. Fancy taglines do not sell cars; quality does.
      They would sell alot more cars if they didn't take so long 'watering down'
      their 'phenomenal concept car designs' with mundane designers waiting
      to retire. A good example is the "VOLT". What a great concept design !
      What a lousy production 'copycat' of the Caprice !
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