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.

In terms of the planned expansion and hiring, about 1,350 laid-off union workers are first in line for new jobs. After that, GM plans to hire B scale workers at about $14 an hour, or half of current levels. The UAW's position on the future of B scale is unclear.

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A second issue concerns the extent to which GM's market share gains are sustainable. The automaker's April U.S. market share was 19.6%, up from 18.7% in the same month a year earlier. GM and Ford ( F) are both touting gains in the small car segment and, in the case of GM, the Chevrolet Cruze is an obvious winner that was the sixth best-selling car in the U.S. in April, with volume of 25,160 units.

"Cruze has crazy sales numbers right now," said Thormahlen. "A lot of the company's rebound and growth is from Cruze." But Thormahlen noted that GM's first quarter share was just 16.8%, its lowest in decades, and that in April, "the Japanese automakers were hog-tied." Looking ahead, he said, "second quarter for GM will be spectacular. But that sales pace won't necessarily stick for third quarter and beyond. "

Among leading Wall Street analysts, the view on GM stock is generally favorable. Even S&P's Levy, initially a skeptic, now rates it a strong buy and believes that expansion is justified. "We will eventually reach 17 million" in annual sales, he said, up from expectations of about 13 million this year. "They will need capacity to meet that increase, and they are going to choose which vehicles to invest in and which plants to expand.

"There are risks in any plan," Levy said. "Things could go awry, but I think their expansion plans are within reason." As for the stock, Levy rated it a hold in December, when he initiated coverage , but said "when it got below $32, it was attractive." He has a $42 target price.

-- Written by Ted Reed in Charlotte, N.C.

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