Why We're Sitting Out This GM IPO

| About: General Motors (GM)

We don’t usually cover individual stocks nor do we discuss or recommend specific stocks to our clients. When we write certain segments on occasion, it is usually to raise some awareness. The upcoming $10 billion IPO for General Motors, recently emerging from bankruptcy, gives some cause for concern.

Despite the understandable investor skepticism, having been burned just a couple of years ago, it appears that the new General Motors will have no difficulty in raising the $10bn funds. It looks like the new IPO will be oversubscribed multiple times. To refresh our memory though, let’s look at a chart of GM during the past decade.

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Source: www.ft.com

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Although GM had difficulties in the 1980’s, the company really drove its business completely into the ground in this recent decade. After the $45bn government bailout and subsequent restructuring process, the new company promises to be different - leaner perhaps. And there is lots of institutional interest to get a piece of the pie in the upcoming IPO. For instance, talk about a Chinese company ready to acquire a stake in the new GM hit the wires this week.

But despite the new management, a leaner company structure and a well-meant effort to make this company work, we should consider the following caveats before lining up to buy newly issued GM shares:

Challenging economic conditions in the U.S. and in Europe weigh heavy on prospects of rising car sales. An industry that has been consolidating over the past few decades will continue to depress profit margins. High oil prices above $80 won’t help in that regard either.

More importantly though, let’s not forget the real driver for sustainable long-term success of a company: Its products.

GM is still building the same heavy, bulky looking cars that use too much gasoline and are for the most part used to transport air rather than people (consider the absurdity of a single person driving a 3 ton vehicle that can seat 7-8 people).

Granted that beauty is in the eye of the beholder, but if GM wants to get my money, they need to build well-engineered, sharp-looking and reliable cars that drive exceptionally well. Not to step on too many toes here, but I don’t see those kind of cars being built by GM yet. The Chevy Volt is a step in the right direction but it may be too little too late.

If GM were to come up with cars that look as sharp and function as well as say an iPhone, they would see real consumer demand and would certainly have me line up as a buyer. Until then, I would let the big institutions haggle against each other in the upcoming IPO.

Disclosure: No positions