BOSTON (TheStreet) -- General Motors (GM), which released earnings today, is expected to reclaim a global sales lead, overtaking quake-damaged Toyota (TM). GM remains a compelling long-term value, and its stock has rebounded 5.4% since hitting a post-IPO low on April 19. A recent uptick in auto optimism, helped by a solid quarterly report from arch-rival Ford (F), is just the latest reason to consider this undervalued stock for 2011.
UBS believes "GM will be the biggest beneficiary of the upcoming Japan-related inventory shortages, with the potential to gain as much as 110 basis points of additional share in 2011. We expect these gains can boost 2011 EBIT by $1 billion and EPS by 60 cents." A 60-cent uptick in fiscal earnings per share is no minute addition. It could materially help the outlook for GM's stock. The new $42 target at UBS is equivalent to a 2012 enterprise-value-to-EBITDA multiple of 4 for core auto operations, with $6 a share for China joint ventures, $4 a share for NOLs, or net-operating loss carry forwards, which may allow GM to shield anywhere from $14 billion to $19 billion of profit from taxes. UBS also allotted $1 a share for a stake in Ally, made up of GMAC assets, which may go public. While online-financial Ally is a valuable asset for GM, its NOLs are even more valuable, especially for those considering a comparable auto stock like Ford. When GM filed for bankruptcy, its bondholders and stockholders were essentially wiped out, but the new GM has a claim on their losses, which allows it to avoid taxation. This seems incredibly unfair as better-managed Ford, which avoided bankruptcy, has no such tax advantage. This is a classic example of moral hazard. Where is the incentive to be risk-averse when losers are rewarded and survivors are punished? This sort of behavior irritates laissez-faire economists, but it provides a rare opportunity to stock investors. One potential overhang still deterring investors from buying GM is a sale by the U.S. government, which still controls 33% of the float. A government sell-out would dilute existing shareholders. However, the market has largely priced in this outcome and, arguably, this is one reason that GM trades at a peer discount to Ford. While UBS sees Japan as the catalyst for GM, it also has upgraded its estimates for first-quarter adjusted earnings, expecting $1.09, substantially higher than the Wall Street consensus of 93 cents. UBS expects a jump in North America volume, but concedes that commodity inflation and incentives are relevant concerns.
Another potential headwind for GM is a second oil spike. UBS believes that a spike could present a $1.5 billion obstacle for GM. Consumer spending is extremely sensitive to gasoline prices, which are at fresh three-year highs. Should commodity momentum continue, GM's stock may suffer. On the other hand, the new fuel-efficiency tilt of its product mix should help retain brand relevance, should a secondary spike occur. Crude oil is off its 2011 high, helped by news that the U.S. Navy SEALs killed al-Qaeda leader Osama bin Laden on Sunday. GM has a foothold in emerging markets and is growing rapidly, particularly in China and Brazil. Of its fiscal 2010 cumulative sales, 14% came from international operations, with 7% coming from Brazil alone. GM is investing $5 billion in China, according to management, attempting to double its regional sales to five million vehicles a year by 2015. A weak dollar supports this effort as there is greater flexibility for pricing in appreciating emerging-market currencies. GM is launching a China-exclusive brand, Baojun, to assist domestic branding efforts. The first model, the 630, a low-cost, mid-sized sedan, is due this year.
-- Written by Jake Lynch in Boston.
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