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Investors See New GM Challenging For Global Leadership

UAW Talks Loom, But Union Ownership Likely To Spur Restraint
U.S. Market Could Hit 14 Million In 2011, 15 Million By 2012

General Motors, rejuvenated after its bankruptcy and spurred on by a recovering U.S. market, looks set to become an investor’s favourite.

About 18 months after emerging from bankruptcy and its relaunch on stock markets in November last year, investors are predicting that GM will soon be challenging the most profitable auto companies.

“GM’s current financial prospects appear to be on a par with the strongest in the global auto industry,” said Morgan Stanley auto analyst Adam Jonas.

“We see no structural reason why GM cannot one day be a dominating force in the global auto industry. While it’s too early to give the company the benefit of the doubt, we believe GM has the potential to one day produce the earnings and cash flow required to justify a valuation closer to $100 than $50,” Jonas said.

GM shares have traded from $33 to just over $39 in its brief return to the stock market.

Deutsche Bank said GM is now solidly profitable in North America, and is poised to benefit from an upswing in sales there.

“We believe that GM has the potential to benefit greatly from a cyclical recovery in North America – each one million increase in annual sales should add at least $1.3 billion to earnings. Indeed, GM’s operating leverage could be greater than nearly any other global automaker, as its fixed costs should remain relatively flat even as demand recovers. GM should also benefit from a future restructuring of its European operations,” the bank said in a report.

U.A.W stake
The U.S. government now owns 33 per cent of GM, after cutting its stake from 61 per cent with the share flotation. The Canadian Government now also owns about 10 per cent and the United Auto Workers union has a small stake. GM has had a successful 2010, reporting an EBIT (earnings before interest and tax) profit margin of 6.7 per cent in the third quarter.

One big problem remaining for GM to solve is the fate of its ailing European subsidiary, which makes Opels and Vauxhalls. In the first nine months of 2010 GM Europe lost more than $1.2 billion.

Morgan Stanley’s Jonas said GM Europe is still structurally challenged, and even after restructuring is only a break-even EBIT business which consumers $0.5 billion of cash a year.

Jonas said GM’s revival will benefit from an expected strong rally in U.S. sales, which he expects to reach 14 million in 2011 from 13 million in 2010, and roar on to 15 million by 2012. The only constraint will be available capacity, Jonas said.

GM is also benefiting from good publicity for its new products like the Chevrolet Volt, named by Motor Trend as 2011 Car of the Year, and high expectations for the 2012 Chevrolet Malibu and major redesigns of full-size pickups and sport utility vehicles in 2013.

After GM collapsed under the pressure of its huge debts, it eliminated four brands – Saturn, Pontiac, Hummer and Saab and retained Chevrolet, Buick, Cadillac and GMC.

Potential cloud
There is one potential cloud looming on the horizon. Contract negotiations with the United Auto Workers union open later this year. Any move by the UAW to grab back wages and benefits lost during the bankruptcy, might make investors uneasy. But with the UAW now owning a substantial stake in new GM, why would the union seek a deal which would damage its own interests?

Neil Winton – January 15, 2011

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