It’s not unusual to see a newly minted stock listing gain ground in the market after an initial public offering, and shares of General Motors are no exception.
With a closing price of $37.90 a share Tuesday, the automaker’s shares have posted a nearly 15 percent gain since the automaker returned to public trading Nov. 18 at $33 a share. Still, many analysts believe that’s just the beginning, with some saying GM could sell for as much as $50 a share in the near- to medium-term.
Yet by comparison to rival Ford, the biggest of Detroit’s so-called “Big Three” automakers is a laggard. Since bottoming out at barely $1 a share at the start of the recession, the nation’s second-largest automaker is now trading above $17 a share, a figure it hasn’t seen in nearly a decade.
With the strong stock performance by Ford and GM and U.S. vehicle sales up 11 percent last year, the industry is riding high going into next week's annual Detroit auto show, even if sales levels are still well below their peak of a few years ago.
The situation is a huge reversal from a year ago, when few would have been willing to bet on auto stocks. Post-bankruptcy, the big Detroit automakers looked weaker than ever and questionable opportunities for investors. Even Ford looked as though it would struggle without a government handout.
A year on, the outlook is much brighter. Investors are looking at Detroit auto stocks as one of the best bets for the coming year. And analysts are raising questions about what Chrysler might deliver if, as expected, the once-bankrupt and still struggling carmaker takes itself public later this year. CEO Sergio Marchionne has suggested that the solid reception given its former partner in bankruptcy, General Motors, could bode well for his company too.
“If we’re looking at a good 2011, with (industrywide) sales climbing to maybe 12 million (units), it could be a strong year for all the companies,” said Joe Phillippi, a former Lehman Bros. auto analyst who now runs the consulting firm AutoTrends.
There’s no question that the slow but steady recovery of the U.S. automotive market is helping industry stocks gain ground. The upturn can be seen almost everywhere, from key suppliers, such as Canadian-based Magna International, to new entrants such as Silicon Valley battery-car maker Tesla Motors, which appears to be recovering from a late-2011 speculative setback.
But few companies can match Ford, which saw its stock price dip to just $1.26 on Nov. 19, 2008, when it, too, seemed certain to need a helping hand from Washington to survive. But guided by its new CEO Alan Mulally — and backed by a risky decision to raise cash by mortgaging its assets — Ford avoided bankruptcy and managed to claw through the recession on its own.
More importantly, it countered the traditional industry strategy of retrenching during a downturn. Sure, it closed unnecessary plants and eliminated thousands of jobs, but it also kept rolling out critically well-received new products that led to steady gains in sales, market share and earnings. Today, with investors paying more than $17 a share, Ford is trading at about 5.5 times estimated book value.
GM, on the other hand, is trading at a 3.9 multiple.
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“Thus, we think investors have an opportunity to buy GM at a depressed value,” analyst Christopher Ceraso of Credit Suisse wrote in a report late last month.
If anything, GM’s shares have won approval in recent days, reflecting the end of a 40-day quiet period following the November IPO during which the company’s underwriters could not legally comment on the stock.
Analysts from eight banks began covering GM again last week for the first time since the automaker went bankrupt in May 2009.
There were plenty of questions as GM approached its eagerly awaited IPO in mid-November. Chief among them was whether investors would reward a company that had left many of them clutching worthless paper when it filed for Chapter 11 in 2009.Story: Detroit's Big Three automakers post solid 2010 sales
The answer was a resounding yes. In fact, the IPO price — originally estimated at $26 to $29 — was moved up to $33 just before Wall Street’s opening bell on GM’s IPO day in November. And GM added millions more common and convertible preferred shares to the pot, ultimately generating more than $23 billion in the public stock offering, the largest in U.S. history.
Analysts are now setting targets ranging anywhere from $38 to $50 a share. Credit Suisse’s Ceraso says that “GM offers an attractive 12-18-month investment opportunity.”
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GM’s appeal has been enhanced by the company's unexpectedly solid market performance. Despite eliminating four of its eight North American brands post-bankruptcy, it’s gaining market share. More importantly GM is turning a profit in a market that’s still down by nearly a third from its peak, seen a decade ago. That’s in sharp contrast to years past when GM lost money in some of the best years in the domestic industry’s history.
“We can make significant profit even in today’s difficult environment,” GM CEO Dan Akerson told potential investors prior to the IPO. Chief Financial Officer Chris Liddell echoed that sentiment by forecasting earnings could reach $19 billion — with margins reaching 10 percent — at the peak of the current cycle.
GM had net income of $2.1 billion on revenues of $34 billion in the third quarter, according to figures published befopre the IPO.
Of course, as several analysts have cautioned, there are also “negative headwinds.”
The cost of the raw materials used to make a typical car has surged lately, and some of the more exotic materials are in downright short supply. Then there’s the recent rise in fuel prices, with some observers predicting fuel costs could jump to $5 a gallon. While GM and its cross-town rivals have been reducing their dependence on fuel-hungry trucks, the cost increase would still be a serious problem for their profitability.
GM, meanwhile, continues to struggle in Europe, where it nearly sold off its wounded Opel subsidiary in 2009. But that’s offset by strong performance in emerging markets like Brazil and particularly China where it’s a dominant player, noted Phillippi.
GM’s solid business performance could set the stage for Chrysler’s planned IPO, which CEO Marchionne has repeatedly suggested will take place in late 2011 — although some observers predict it will be pushed back to 2012.
The GM IPO was “great news,” said Marchionne at the L.A. Auto Show in November.
“GM has done a lot to open up the market for us,” he said. “We’ll do a lot better [with Chrysler’s own IPO] now.”
Marchionne, who also serves as CEO for Chrysler’s Italian partner, Fiat, has a lot to prepare for.
Fiat, for one thing, stands to boost its stake in the U.S. carmaker from 20 percent to 35 percent if it can meet three hurdles set by the Obama administration, including boosting sales of Chrysler’s products overseas. It can gain another 16 percent — potentially giving it majority control — if it pays off loans from the U.S. and Canadian governments ahead of the 2013 deadline.
Marchionne, speaking from the Milan Stock Exchange this week, said he doesn’t plan to push through a complete merger of the two companies. But there are plenty of matters yet to resolve before Chrysler can follow GM back on to the New York Stock Exchange.
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