The excitement around General Motors Co.'s initial public offering is high, yet at its heart, the offering remains simply another play on the economic recovery.
In fact, buying either GM or rival Ford Motor Co. means that "75 per cent of what you are buying is a perspective on the economy," said Michael Yoshikami, chief investment strategist at Bay Area-based YCMNET Advisors, which manages about $1-billion (U.S.) in assets. "[If] you are seeing no double dip, no high inflation, unemployment drops, then these stocks are a buy."
"People buying into [GM]are late entrants in the consumer story," Yoshikami said. "If you already missed the boat on consumer stocks, this is a last chance to get in, because auto companies are the last to recover."
In general, Yoshikami prefers cheaper consumer stocks, such as Costco Wholesale Corp. and Wal-Mart Stores Inc. . For autos, he prefers Ford because "Ford has more opportunity in China and Ford has been overall a better run company."
While GM's offering is technically an IPO, it is not at all typical for the genre. It does not present an opportunity to buy in early on an innovative new product that will soon have consumers buzzing and technologies adapting. "We follow IPOs very closely," Yoshikami said. "Anything that has the word 'China' or 'Internet' or 'India' in the name has done well. But GM is a cash flow company -- not a hot products company -- so you'd better be buying it for fundamentals and cash flow."
Of course, while IPOs are common events, IPOs by companies that sell 11.5 per cent of all the motor vehicles in the world and 18 per cent of all the vehicles sold in the U.S. are not so common.
What makes General Motors an attractive option besides its market presence, is that it reduced costs in bankruptcy; it is making money at a low point in the automotive sales cycle and it is well-positioned in the world's fastest growing markets.
For the moment, GM benefits from the performance of its closest competitor, Ford, a poster child for corporate turnarounds. Ford shares rose 334 per cent in 2009 and are up about 62 per cent in 2010.
Expected Thursday, GM's IPO could raise around $22.5-billion (U.S.), including the sale of preferred stock, making it even larger than the 2008 Visa Inc. V-N IPO, which raised around $20-billion.
According to its revised registration statement filed early Wednesday, GM has 478-million shares to sell, priced between $32 and $33, amounting to about 31 per cent of the company. Additionally, underwriters have the option to buy an additional 72-million shares, which would bring the total sale to about 550-million common shares for about $18-billion at the median price. GM is also selling about $4.6-billion worth of preferred shares.
Investors can buy GM shares once public trading begins on the New York Stock Exchange. Lead underwriters for the IPO are Morgan Stanley and JPMorgan Chase. A variety of other investment firms including Bank of America and Goldman Sachs also have allotments to sell.
However, some trading shops, including E*Trade, TD Ameritrade and Charles Schwab, were not getting access to the GM IPO, which means investors cannot purchase stock through these sites until NYSE trading begins.
In the third quarter, GM produced income of $2-billion -- or $1.20 a share -- on revenue of $34-billion, while Ford produced income of $1.7-billion -- or 43 cents a share -- on revenue of $29-billion. Analysts surveyed by Thomson Reuters estimated Ford will earn $2.05 this year, meaning the company trades at about eight times projected earnings.
If GM's third-quarter earnings equate to a quarter of full-year earnings potential, then eight times earnings would value its stock around $38. But while Ford is a company on a roll, GM is a company with untested management and its fourth CEO in twenty months.
Investor and RealMoney Silver contributor Doug Kass has a year-end 2011 price target of $55 on GM shares. He estimates the company will earn $5.40 a share in 2011, up from $3 a share in 2010.
Casey Thormahlen, an analyst at Los Angeles-based market research company IBISWorld, said he is skeptical about GM because management is so unproven. "The products are good but [are]not segment leaders, and the competition is really tough," he said. "They get their sales from people who want to buy an American car.
"GM has made some gains with their products, but there's still a lot more to do," Thormahlen said. The just-launched Chevy Cruze, he noted, "is a good car but not as good as competitors, and [it's]higher-priced."
The Chevy Volt is "a tough sell" at the price. The Chevy Malibu is "a decent car, well built; it has made a lot of gains in the last two years."
Edmunds.com senior analyst Michelle Krebs said it remains to be seen whether GM has fixed itself in bankruptcy. "I'm not over the moon just yet," she said. "So far, all their new launches have done well, but we have got to see whether they have truly changed their way of doing business. "
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