After two months as a newly-public company,shares of
have posted a decent 10% gain, slightly better than the 6% gain
posted by the S&P 500.
Then again, rival
Ford Motor (NYSE:
has risen by an even more impressive 14% since the day GM went
public. So was theIPO a dud? Not according to Morgan Stanley's
analysts. They predictshares will rise from a recent $38 to $100 --
a gain of more than 150%. That kind of price target seems awfully
aggressive when most analysts expectshares to rise to $45 or $50.
Let's look at why Morgan Stanley is so impressed with the "new"
Cash is king
According to Morgan Stanley, GM is on the cusp of printing money.
They think the recent major cost cuts will set the stage for a
steady surge in profitability as industry sales volume starts to
Right now, GM is valued at about $58 billion. Yet the automaker's
cash balance could exceed $70 billion by 2015, according to Morgan
Stanley. (Cash currently stands at around $19 billion). Most of
those gains will come in 2013, 2014 and 2015, when GM averages
roughly $14 billion in annualfree cash flow for each of those three
years. Looked at another way, the projected 2013free cash flow (FCF
)yield on GM's currentmarket value is 24% ($14 billion divided by
$58 billion). A 24%FCF yield ranks among the highest of all
To be sure, Morgan Stanley's analysts are far more bullish than any
other industry watchers. For example, they think GM will earn $6.25
ashare this year. Most analysts assume that pershare profits will
be around the $4 mark. And while most analysts seeearnings per
) rising to $5 in 2012, Morgan Stanley thinks we'll see $7 or $8 a
share in profits next year. By 2015, they seeEPS approaching $10,
while most others don't even look out that far.
Why the divergence in outlooks? Because Morgan Stanley predicts
that GM will start to re-take lostmarket share in mature markets
while also becoming a major player inemerging markets . The Morgan
Stanley analysts have a point. GM has emerged as a powerful player
in the fast-growing Chinese market, most notably with its Buick
brand. And the company is working to extend that momentum into
other Asian markets.
In decades past, U.S. automakers could barely make a dent in
countries like Japan and Korea, thanks in part to restrictive
import policies in those nations. Yet the real reason for tepid
Asian sales may have been the fact that the GM tried to sell
massive cars with thirsty engines in countries where the streets
are narrower and taxes weigh heavy on cars with engines larger than
two liters. These days, GM's product line-up is far more compelling
with an emphasis on fuel efficiency and comfort.
The speed bumps in the road
But Morgan Stanley could be wrong a pair of counts. First,
competition has never been fiercer. Simply put, there is no such
thing as a bad automaker these days. All of them sell attractive
and reliable vehicles.Market share gains are no sure thing.
Secondly, Morgan Stanley forecasts a steady rebound in car and
truck sales in coming years as the globaleconomy rebounds. Indeed,
they should rise somewhat higher this year, but continued gains in
subsequent years may be hard to come by. Consumers are learning
that there is no need to replace a car after it hits the 100,000
mile mark. And as cars last longer, total U.S. industry volumes are
unlikely to ever re-visit the peaks of 2004 to 2007.
Morgan Stanley's analysts are betting that emerging economies such
as India, Vietnam, Turkey and elsewhere will help offset the
down-sized Western automarkets. They may be right, but it's too
soon to tell.
Another more prosaic reason to be a bit cautious on Morgan
Stanley's very aggressive price target: That target implies an
uninterrupted path of global economic growth for the next four
years. And few want to make that bet. Goldman Sachs, for example,
sees GM'sshares rising just up to the low $40s, simply because it
is assessing the stock by expected financial performance in the
next two years. Goldman Sachs notes that GM's European operations,
spearheaded by the Opel brand, have a majorturnaround effort ahead
Action to Take -->
We'll get a pretty quick read on whether Morgan Stanley is on to a
hot idea, or if the analysts are simply being naive. GM will
release 2010 fourth quarter results in early February. Most
analysts expect GM to earn around $0.50 ashare . Morgan Stanley
thinksEPS will come in at $0.91. If they're right, then other
analysts might begin to follow Morgan Stanley's lead and talk of
much higher price targets. Perhaps not the $100 that Morgan Stanley
speaks of, but maybe in the $50, $60 or even $70-range.
This sets up an attractive risk/reward scenario worth watching (and
possibly profiting from). If Morgan Stanley is wrong and GM earns
around $0.50, thenshares are likely to stay put. It seems quite
unlikely that GM will miss thatprofit forecast, as we already know
that recent sales trends have been pretty good. So downside from
current levels looks limited. But if GM posts a strong quarter,
then the Morgan Stanley analysis will be widely circulated and
could quickly start to rise.
To get to Morgan Stanley's price target -- if it ever happens --
will take several years. That's because most auto industry analysts
see the world in 90-day increments. That's why they mostly missed
the boat on Ford, slowly raising their price targets as its shares
rose from $3 to $18 during the past two years. But just as Ford has
emerged from the downturn in fighting shape, so has GM. Ford has
been the darling play for many investors in recent years, but GM's
upcomingearnings release may change that dynamic.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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