Once bearish on the Big Three carmakers, Saul Rubin, an analyst at UBS Warburg, is recommending that investors buy
, on the basis of expectations for better earnings as it stabilizes market share and reduces costs.
Plenty of investors have of late. The company's shares are up more than 20% in December alone.
Despite assuming flattish North American industry volume out to 2006, Rubin said GM could earn as much as $8 a share at trend demand within the next three years, and he raised his price target on the stock to $66 from $52. (UBS Warburg has a banking relationship with the company.)
"We apply a 10-times multiple and discount back to bring us to our $66 target ... up from $52," Rubin said, in a research note. "We normally use an eight-to-10-times multiple range. But the recent move to reduce pension volatility allows us to push to the higher end of that range."
Meanwhile, Rubin said that GM has better earnings quality than
, a better product pipeline, a leaner manufacturing base, a more effective procurement process and a stronger management team.
"We have argued for some time now that GM is a much stronger company than Ford or
and continue to believe this to be the case," he said. "GM has spent many years building out a lean and common manufacturing footprint and is now putting out high-quality product. GM's pipeline in the coming years contains a good amount of differentiated product and shows that GM can be innovative, despite its size."
According to Rubin, recent changes to asset allocation in the company's pension plan lower the risk of owning GM stock. "They are gradually moving in the direction of immunizing the pension plan from market fluctuation, and this is positive for shareholders," he said.
In recent years, GM's huge pension gap has been a drag on results. The car manufacturer recently announced that its pension plan was fully funded, thanks to strong investment returns and a major bond offering this year.
"The company claims to be moving to a portfolio structure that will have 40% lower volatility than the existing structure," Rubin added. "This is a very significant change. It also appears to be using derivatives to extend the duration of its fixed-income assets."
Last May, Rubin said Ford, GM and Chrysler could be headed for Chapter 11, because of their leveraged positions and weakening trends. "It's not around the corner, but not out of the question," he said.
Since the beginning of the year, GM shares are up 44%, reflecting a rally in the auto sector and improvement in macroeconomic trends. The stock was recently ahead $1.07, or 2%, at $53.05.