General Motor's IPO: A Winner or Loser for Investors?

by Tony D'Altorio

GM's IPO: A Winner or Loser for Investors?

by Tony D'Altorio, Investment U Research

Friday, November 12, 2010

Parts of Wall Street are getting all excited over General Motors November 18th IPO.

Shares will consist of $7 billion held by the U.S. Treasury, $2 billion held by the United Auto Workers (UAW) and $1 billion by the Canadian and Ontario governments.

The money realized will add to the $9.5 billion GM already paid back to the U.S. And Uncle Sam's 61% stake will fall to about 40%.

That's all well and good, but even then, it still owes taxpayers plenty after the $60 billion bailout it got last year.

The Detroit carmaker looks set to easily raise the full $10 billion it seeks in the IPO. If the stock begins somewhere between $26-$29 per share, GM will have an initial valuation of about $49 billion, on par with Ford Motor (NYSE: F)'s market capitalization.

Its expected success comes largely from the fact that the IPO is priced to sell. After all, neither GM nor the U.S. government can afford to see it flop.

And admittedly, the company restructured its operations and finances as of late. That led to net profits and positive cash flow for the first half of this year, and will probably do the same for this most recent quarter.

Yet despite all that, the upcoming stock looks something less than desirable.

Jim Cramer Predicts "Smashing Success" for GM's IPO

Going forward, General Motors' main goal is to persuade investors that it has mended its ways. So CEO Dan Alderson says he intends to improve the quality of GM's cars and streamline communications throughout the company.

Jim Cramer certainly likes that story, predicting GM's IPO will "be a smashing success."

For sure, GM does have positive factors in its favor, like the $33 billion in cash it had at the end of the second quarter. Additionally, it will enjoy $45 billion in tax-loss carry-forwards to shield its earnings from the IRS for a while.

Also in its favor, the company still sells more cars than any other manufacturer, save Toyota Motor ADR (NYSE: TM). It's set to produce 7.34 million light vehicles in 2010, not including those made through joint ventures.

But perhaps most importantly, GM sells over two-thirds of its vehicles outside of North America. And it plans to continue strengthening its presence in emerging markets.

It already boasts the top combined market share in Brazil, Russia, India and China. With 13% market share there, it easily beats out Ford's 3%, Toyota's 4% and Volkswagen ADR (OTC: VLKAY)'s 11%.

GM sells the third most vehicle sales in Brazil and the second most in China, where it sold 1.57 million cars and light trucks from January 2010 through August.

GM's Market Share Struggles in Europe and the U.S.

On the downside, General Motors is struggling in Europe and the U.S. Its market share in the latter slipped by nearly a point to 19% this year.

Plus, its checkered past has led some money managers to pass on its IPO altogether. Douglas Davis, president of Toronto-based Davis Rea, explains that since he doesn't "know whether it won't be more of the same problems," he and his will stay out.

David Sowerby, portfolio manager at Loomis Sayles, has his doubts as well: "Over the years, they have not been a creator of wealth. GM has traditionally done the least amount they could to solve a problem."

Hardly a great recommendation, especially considering the bigger picture. Car companies trade at structurally lower price-earnings multiples than nearly any other sector because they operate under profit-squeezing, competitive conditions.

But even if that wasn't so, General Motors still wouldn't look good...

Optimists quickly point out that GM's bankruptcy eliminated much of the company's debt. True, but what about GM's massive pension plan with about $100 billion in liabilities?

The world's largest, it transferred as-is to the "new" company... all in order to keep the UAW happy. So the GM rescue means little in the end.

Sure, it isn't making any contributions to the pension fund now. But it says it may have to put in $4.3 billion in 2014 and $5.7 billion in 2015... and maybe even more in the future.

If that happens - and it will - General Motors will probably face bankruptcy again some day down the road.

Good investing,

Tony D'Altorio

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