A sum-of-the-parts analysis is one justification for Morgan Stanley's $50 target. First, nearly half of the current stock price, or $14, is accounted for by cash on hand. The bank estimates the value of deferred tax credits and NOLs, or net operating losses carried from the bankruptcy, at $9 a share. The NOLs allow GM to defer profits from state and federal taxation. Morgan Stanley values Chinese joint ventures, critical to growth, at a conservative $5. Thus, "one can account for nearly 100% of the GM share price before considering its consolidated operating business." Morgan calculates a bear-case target of $22, assuming a modest recovery to a 12 million SAAR, a European margin at negative 2% and no growth in the Chinese ventures. Its bull-case price target is $72, meaning the stock could rise 126%. In truth, the most likely scenario is an ongoing shift to a weaker product mix in the U.S., where consumers have developed a taste for fuel-efficient vehicles, and rapid growth in BRIC nations. Relative to Ford, GM is leveraged to these growing markets, which should drive sales and margins, going forward. In addition to more amenable labor agreements, the new GM has a vastly superior balance sheet, with a net cash position (cash minus debt) of about $25 billion. So, those who argue that channel stuffing is proof of a resumption of bad habits are making a selective argument. Net liquidity, a U.S. tax shield until 2018 and developing market leverage are solid investment merits. With that being said, the domestic business remains pressured, especially as gas prices rise. Crude oil remains near $100 a barrel. On Tuesday, Barron's made the case for $150 oil by next spring, citing fundamental evidence for a sustained uptrend. In such an environment, consumer spending will, again, be crimped and many would-be car buyers will delay new purchases, even on fuel-efficient vehicles, which still require a substantial up-front cost. Morgan Stanley may have gone out on a limb with its forecasts. For example, its 2012 earnings estimate, at $6.60 a share, is 31% above the Wall Street consensus. Its 2013 projection, at $7.90, is 24% above the consensus. Even though these estimates appear aggressive, the central thesis is not. GM's stock has a median price target of $43.55, suggesting it has 40% upside, and is considered, even by those with "hold" recommendations, to be undervalued. GM is a bargain for long-term investors.
-- Written by Jake Lynch in Boston.
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