Will GM Get To $53? And If So, How?

Sep.18.12 | About: General Motors (GM)

When will General Motors (NYSE:GM)' stock touch $53? This is the only question that GM investors were found asking yesterday, when they came to know that this is the break-even price at which the government will be able to fully recover its initial bailout amount of $50 billion, which was used to rescue GM from bankruptcy in 2009.

The ties between GM and the government have been in a state of continuous tension after the latter rejected GM's proposition that the state sell off its stake in the company. This was a recap of an earlier episode in the summer, when GM wanted to buy 200 million out of the 500 million government-owned shares, but the government declined the offer.

The Treasury Department is justified in its own stance, as a current sell-off of the entire stake will lead to a loss of over $15 billion at today's GM stock price of $23.8. The Treasury has no reason to rush into such a deal. This deal has a political dimension to it as well. Obama, after rescuing GM in 2009, took the stance that the $50 billion bailout had saved thousands of jobs, and was a win-win situation for both the business and taxpayers alike. However, a hefty loss in a current offload of GM shares will ruin the government's record of helping the economy recover through its intensely-criticized bailout money. Recently, Obama's administration has increased the estimated loss on the auto industry bailout by $3 billion, to a total of over $25 billion. However, this is still less than the $44 billion loss that was initially estimated.

The following graph shows different GM stock prices under which the Treasury will be making a profit or loss:

Click to enlarge

A government spokesperson was reported as saying that the Treasury did not want to hold GM for long, and would get out of the company when the stock surpasses a suitable limit. The market believes that the state might agree to offload the shares in the mid-$30s range.

On the other hand, GM wants to rid itself of the tag "Government Motors." executives are frustrated by the salary caps imposed by the government, which hamper the company's ability to hire experienced blood from the market. The iron-fisted Dan Akerson is determined to change the bureaucratic nature of the company, which was one of the main reasons for GM's failure in 2009. He has already formally announced a reorganization of the company, which was positively received by the market.

How will GM's shares reach $53?

GM's stock is almost 28% below its 2010 IPO price of $33. No one in the Street knows when GM's shares will reach this mark, but many can predict the ways in which it can make the climb. Upfront, GM has three avenues to make its way up:

  • The company is heading towards the biggest product launch since its inception. In this phase, GM plans to revamp 80% of its current lineup in a couple of years.
  • A turnaround of European operations, which are incurring massive losses. Currently, GM expects to incur a loss of $1.4 billion in Europe. Also, Akerson said that it will take 5 years for the company to make its Opel plant profitable.
  • GM can build upon its sales in Asia. The company reported a 7.3% YoY rise in Chinese sales in August. GM obtains 10% of its revenues from China. The company has forecast the Chinese market to be as large as 30 million vehicles by the end of 2020
  • GM has formally announced its reorganization plan. There are certain milestones that the company plans to achieve, like implementing a new accounting system that will better suit the reorganized structure. The stock is expected to move up as the targets are achieved.

Almost everyone believes that GM has no chance of reaching the $53 mark by election time, which is only two months away. Revamping of the product line will take a good two-to-three years. The conditions at the Opel unit have been heavily criticized, after one Morgan Stanley analyst said that GM needs to dump the Opel unit, as its losses were not nearing an end. The Chinese auto market has remained stagnant for some months, although the recent YoY rise for GM is a positive sign for the company.

The elections will be crucial for GM, as Mitt Romney has pledged that he will sell off the stake as soon as he is elected.

Conclusion

GM is trading at a cheap forward multiple of 6x. Although not a single analyst has a sell rating for GM, 4% of the analysts still have underweight ratings on the stock, expecting a tough macro environment to persist. The stock's bullish target price from 17 analysts is $44. The selling off of the state's stake in the company is expected to trigger a huge boost to GM's share price.

GM has more than $33 billion in cash, whereas it requires approximately $20 billion to operate. $5 billion will be needed to buy back the government's shares at the current price. However, given the current circumstances, there are no signs of GM getting rid of the government anytime soon.

Having said that, GM still has many other drivers to propel its stock price, such as the reorganization plan, the new product lineup, and the rising Chinese market share. A recent boost of the CEO's holdings also gives a positive signal. Therefore, the stock is recommended as a buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Industrials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.