This blog post originally appeared on RealMoney Silver on Nov. 15 at 7:58 a.m. EST.At a proposed IPO price of between $26 and $29, General Motors shares are very attractive. General Motors has dramatically transformed its balance sheet. The company has embarked on a meaningful cost-savings program and is poised for above-average cash flow and profit growth. The stock is an inexpensive way to participate in rapid emerging-market growth. Based on 2011 estimated EPS of $5.40 per share, up from $3.00 in 2010, and 2011 estimated cash flow of $16.0 billion, up from $12.7 billion in 2010, my year-end 2011 target is $55 a share, or only 4.1x my preliminary 2012 estimate of $7.20 a share (well below OEM comps).
BackgroundGeneral Motors is the outgrowth of a 363 Sale under the U.S. Bankruptcy Code, under which the company acquired all the assets and assumption of certain of the liabilities of The General Motors Corporation. GM is a global company with 70-plus assembly facilities and 85-plus manufacturing facilities, with over 21,000 independent dealers in over 120 countries around the world. Its product offerings are broad and include passenger cars, light trucks, SUVs, vans and crossover vehicles, representing slightly under 12% of worldwide vehicles sales. The company has a 19% market share of the U.S. auto industry, with 72% of the company's sales generated outside the U.S.
The Case for General Motors
- Markedly improved financial position. The new GM's financial position no longer resembles the old GM, as total debt and other liabilities have been extinguished by $93 billion.
- An aggressive cost-savings strategy will maintain operating margins above historical averages. An aggressive cost-savings program portends a sustained high-level of operating margins. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins should exceed 12.0% by 2012 vs. 9.8% in 2010. Gross margins are forecast at 14.5% vs. 12.5% for full year 2010.
- Emerging market exposure is meaningful. With 40% of the company's sales in high-growth, emerging, non-U.S. markets, General Motors is positioned well and an inexpensive way to participate in emerging markets.
- Excellent short-term profit picture. GM reported $3.5 billion of cash flow in third quarter 2010, cash flow year-to-date of $10.5 billion and 12-month trailing of $11.5 billion. Given management's guidance on the conference call, full-year 2010 revenue, EBITDA and free cash flow should total $131 billion, $12.7 billion and $5.3 billion, respectively.
- Industry auto sales are depressed, and intermediate-term expectations are low. Worldwide automobile industry sales are depressed and future expectations are modest. A steady albeit slow improvement in industry sales provides a broad runway of growth for General Motors.
- Inexpensive valuation. At an estimated IPO price of $26 to $29 per share, General Motors' enterprise value to EBITDA is only 4.5x, 3.6x and 2.9x 2010, 2011 and 2012 respective estimates. The company's P/E is less than 6x 2011 estimates and approximately 4x 2012 estimates. On a post-exchange basis, free cash flow yield estimates for 2011 and 2012 are at 11.5% and 15.9%, respectively.