If all goes well, by this time next week General Motors will again be a publicly traded company. The result is that you can be a GM shareholder, maybe even get a piece of the initial public offering. Should you?
GM executives have been on a road show this week to sell the deal. It’s a sign of GM’s turnaround that they’re traveling on private jets in the name of efficiency and this hasn’t triggered any populist outcry in Congress. You can watch the slideshow presentation on the Internet (it lasts about ten minutes) and GM stresses three main selling points: better cars and trucks, demonstrated with gains in market share and pricing; leading positions in two of the highest international growth markets (Brazil and China); and a much more competitive cost structure and stronger balance sheet.
GM’s registration statement offers a more detailed assessment, and I especially like its stated vision, which is “to design, build and sell the world’s best vehicles.” This may seem obvious, but it was all but forgotten at the old GM.
Along with other automakers, GM should benefit from cyclical trends in its favor. After the recent financial crisis and severe recession, there’s tremendous pent-up demand. An improving economy, higher employment and rising consumer confidence should translate into solid growth in North America, and GM should fare even better in emerging markets (in which it has the largest market share).
So let’s concede this is a good time to be buying auto company shares, and that GM in particular seems an attractive candidate for further market share gains. How do the numbers look?
The GM offering hasn’t been priced yet by the underwriters, but GM said it expects to issue 365 million shares – about a quarter of the firm’s common stock – and raise about $10 billion. That would imply a total stock market value of roughly $40 billion.
Based on GM's sales from the past four quarters, a $40 billion market value gives a price-to-sales ratio of 0.3, compared with 0.4 for Ford (F) (whose shares I own and have previously recommended), 0.5 for Toyota (TM) and 0.6 for Honda (HMC).
Price-to-earnings math gets tricky, because quarterly earnings have been erratic for car makers over the past year. If we assume the most recent quarter is representative of quarters to come, GM trades at 5.1 times earnings compared with 8.5 for Ford at 8.5, 26.8 for Toyota and 10.2 for Honda. In other words, GM still looks cheap.
This may in part reflect the political and business reality that this is an initial public offering that can’t afford to flop. A successful offering is essential to GM’s campaign to shed its old stodgy, loser image and shed the taint of government ownership. And the government (which doesn’t seem to be meddling in day-to-day management but remains the largest shareholder) needs a successful offering to enhance its prospects of recouping the massive taxpayer investment.
Of course there are risks, as in all IPOs. There’s a list of them in the GM registration statement. While I’m encouraged by GM’s progress, I believe it still has a long way to go before it achieves its vision of building the world’s best cars. Based on my last visit to the auto show, I’d say its new product line up doesn’t yet match Ford’s. But it has plenty of new vehicles in the pipeline, including the much-anticipated Volt.
So my advice is, call your broker and ask if you can get some shares. (Thirty-five underwriters are participating in the offering.) I intend to. Demand seems to be running high, and if my analysis is any indication, it’s no wonder: Within the stated offering range, GM shares are a great deal.
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