When General Motors rolls out as a public company in an initial public offering -- possibly in just a few months -- investors are going to find a brand-new carmaker that is definitely not their fathers' GM.
Shocked into facing reality by an extended timeout in bankruptcy after the economic downturn exposed serious flaws, including serial design misses and bloated costs, General Motors has gone through some big changes.
GM has corrected several of its old problems, making it potentially a very attractive investment in the IPO.
The carmaker's CEO and chairman, Edward Whitacre Jr., boldly told analysts at a full-day June 29 meeting that he was introducing a new GM to the world. "We are a new and a much different company than we were 12 months ago," Whitacre said.
Refreshingly, this isn't just the usual corner-office hype. And that's why this IPO -- details of which are expected any day now -- is the most intriguing and potentially the biggest of the past several years.
A year in the shop
Just a year ago, the car company that had dominated the industry during much of the post-World War II era was reduced to a shadow of itself by a cumbersome bureaucratic structure and a tendency to "overthink even the smallest decisions," Whitacre says.GM suffered from high costs, an inflexible work force and a portfolio of vehicles that left buyers yawning. These shortcomings were glaringly obvious in an inability to keep up with Toyota Motor (TM, news, msgs) in "green" vehicles while GM continued to crank out SUVs and trucks.
"Now the company is leaner, meaner and greener," McAlinden says.
To be sure, challenges remain. Competition is tough and getting tougher in emerging markets, where GM pins much of its hopes. Europe remains weak. A new management team hasn't really been tested through the typical three- to five-year car design cycle. And most of all, a potentially sluggish economy has consumers moving back into hunker-down mode, avoiding big-ticket purchases.
But as the company, which is now 60% owned by U.S. taxpayers, prepares to hit the market again, consider the bright side: The company has paid back a government bailout, cleaned up its balance sheet and, maybe most importantly, seen strong sales in models such as the Chevrolet Equinox and Camaro and the Cadillac SRX. Strong demand has remaining U.S. factories humming at an impressive 85% of capacity. Most of them won't even close down for the usual two-week midsummer break, a sure sign that things have turned around at a company recently ridiculed as Government Motors. "Factories open this summer -- that's a real change for them," says David Thomas, a senior editor at Cars.com.
Maybe most surprisingly, the turnaround nudged GM into profitability in the first quarter for the first time since 2007. It announced net income of $865 million on $31.5 billion in sales, which were up 40% from a year before.
"There's no question the company is emerging from the dark times it faced not that long ago. Led by the Chevy Silverado and Malibu -- second and ninth in overall U.S. sales so far this year -- GM has seen six straight months of increased sales numbers compared to last year," says Perry Stern, a senior editor at MSN Autos.
Does all this mean GM will be a must-have stock when its IPO hits the market? That's still a tricky call. The fundamentals look good, but we don't know the price at which shares will enter the market -- a thorny issue that the brightest inside underwriters, JPMorgan Chase (JPM, news, msgs) and Morgan Stanley (MS, news, msgs), are no doubt grappling with now. Reuters suggests an IPO that would raise as much as $20 billion and put GM's total value at $80 billion to $90 billion, more than the company's 2000 peak and above Ford Motor (F, news, msgs), but that's very unofficial.
Here's my rule of thumb for now: If GM shares carry a valuation at or meaningfully below that of Ford, the stock is a buy as a long-term bet that the economy will eventually improve. The revamped GM has prospects at least as good as Ford's, if not better.
Treasury Secretary Timothy Geithner has said the IPO would come in the fourth quarter or early next year. There's a political imperative at work here. "We think the Obama administration wants GM's IPO to happen well before the president starts campaigning for re-election, and we suspect GM is closer to being ready than it publicly admits," Morningstar auto-sector analyst David Whiston says.
Let's kick the tires on the new GM and look at the pros and cons.