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TheStreet Open House

GM Headed Down Bloated Road Again?

DETROIT (TheStreet) -- Once bloated, now lean GM (GM) has a problematic new plan: It wants to grow again.

Despite the many recent positive developments for GM, which is set to reclaim its position as the world's largest automaker due to Toyota's (TM) production decline, it is worth asking whether expansion makes sense for a company that collapsed of its own vast weight and fell into bankruptcy two years ago.

GM said last week that it will spend $2 billion at 17 plants, mostly in the Midwest, over the next few months and will create or retain 4,000 workers.

Said Standard & Poor's auto analyst Efraim Levy, "Some people aren't fully buying the story that GM has learned its lesson."

In the U.S., GM currently employs 49,000 hourly workers, down from 74,000 at the end of 2007. In 2010, GM sold about 2.2 million vehicles, down from about 3.9 million in 2007. In 2010, GM reported net income of $4.7 billion, compared with a 2007 net loss of $38.7 billion, or a loss of $23 million excluding items, primarily a one-time write-off of tax credits.

In the first quarter, per share earnings of 95 cents beat the consensus estimate by 4 cents. Yet shares fell 3% on May 5, the day the company reported, an indication that many investors remain skeptical.

In general, while experts are not overly concerned about the growth plans, they are not blind to the history.

"The reality is that there is a long history here, and [growth] is not without risk, not without uncertainty" said J.D. Power analyst Jeff Schuster. "But at this point, GM deserves recognition for what it's accomplished to date. It is moving in the right direction."

IBISWorld analyst Casey Thormahlen said he doesn't necessarily think GM is growing too fast, but he does see two key risks in its path. One is that GM's future depends to a great extent on the UAW.

"The union can greatly increase the costs," Thormahlen said. The two parties face 2011 contract talks, with the union eager to regain some of the concessions it has made over the past few years.

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