General Motors is about to go public again. Speculation is that the stock will be priced between $26 and $29 a share, depending on demand and how much stock is sold. Is this a good investment for the average investor?
I don't know. I haven't seen the prospectus so I can only tell you what I've read so far. Much of what you would be buying is the future, and well, that's in the future where many things can happen.
The basics: November 17 is pricing date and the 18th will be the first trading day. Pricing talk is $26 to $29 a share. The company wants to raise $10.6 billion from anyone who wants to invest. There will also be a $3 billion preferred issue.
The company just reported its quarterly earnings: $2 billion, its third straight quarter of profitability and strong free cash flow for GM ($1.4 billion). In the first quarter, it made $865 million, then $1.3 billion in the second. A nice trend. Last year, in the fourth period, there was a $3.4 billion loss. Sales are up 22% this year for GMC, Cadillac, Chevy and Buick, the four remaining brands for GM.
Management is flying around on private jets again. When they went to Washington in them to testify, they got all kinds of flack. Now it's part of the road show as they try to convince global investors to buy into the company. No one's complaining. Private jets make some sense as the deadline approaches for the beginning of trading. Having done enough road shows, I can vouch for their necessity. One good investor can pay for a lot of traveling. The more investors you see, the better your chances of finding one. In this case, time really is money.
Some of the numbers: management is forecasting an $11 billion to $13 billion in annual pretax profit within the next few years. Profit margins should be between 7% and 8% of sales. But breaking down these numbers shows that GM is expecting about $2 billion of annual profit would come from gains generated by its pension fund, not from making cars and trucks. The company gets to apply pension-fund gains under the new accounting rules, called fresh start accounting, that were applied to GM's balance sheet after bankruptcy. The new rules could also allow GM greater charges to earnings for depreciation and amortization. This isn't your father's GM. It's a whole new ball game.
As for the actual cars GM is making, they're great. Or at least the reveiws say they are. Many of them are so new, they aren't even on the market. But the ones that are, like the Chevrolet Camaro, the Cadillac CTS and CTS-V series, and the ever popular Silverado trucks and GMC products, are doing better than ever. All are seeing strong sales as fit and finish is finally good enough to match German and Japanese and South Korean manufacturers. Yes, South Korean with their Hyundai products.
But the GM car everyone's waiting for is the Chevrolet Volt. I can't remember a bigger build up for a car except for Saturn....which is no more. The Chevy Volt is the all electric with a gasoline motor to recharge the batteries, four door sedan that car magazines are raving about. They all love the way it drives, the fit, the finish, the quality, the new electronics. I haven't read a negative word except for exactly how many miles per gallon it actually gets and that it isn't a pure, plug-in electric....specious ones at best. This is a category killer. Everyone loves the Volt. But it's not for sale....yet.
That's going to be the true test, and maybe the real litmus test for GM. But the IPO is happening before the car goes on sale which will be limited to only 7 states initially, until they can ramp up production for all 50 and beyond. But what if nobody really wants an electric car?
If they do, they can buy several of them now. The Prius has been around for years. You can get special deals on them at your local Toyota dealer now. They used to sell at a premium. And it's not all about the goofy look. People aren't sold on these cars. They're concerned about being stranded when the electricity runs out. That's why the Volt may be the answer for this category: put an engine in the car to charge the battery so you won't be on the side of the road in the middle of the night hoping the next car the comes by has a human in it.
The point is that GM is counting on Volt in a big way. It's supposed to be their savior. What if they make it and no one buys it? Or only a few do? Then those projections will have to be cut way down, no matter what the pension fund contribution is. Electric cars are about 3% of the market now with very little infrastructure to support them (like recharging stands on every block or every few miles on the freeway). They will evolve as more cars like Fisker's Karma and the new sedan from Tesla are made. But they're still at least a year away.
It seems like GM is generating a lot of excitement and strong interest from some big investors like SAIC in China. But for the individual, this one seems like a big gamble which might pay off if the Volt really accelerates sales. That's the big question, and one that only time can answer. In any event, if it starts to trade at $25 to $29 a share, it's almost guaranteed that at some point it will trade below that. That's because the government still has a lot of stock it needs to sell, and any higher prices will surely look tempting to sell into.
- Ted Allrich
November 9, 2010