Wall Street Bets on GM as Mary Barra Prepares to Face Congress

Detroit (TheStreet) --- As Mary Barra prepares, two months into her job as GM (GM) CEO, to face two days of Congressional inquiry into the automaker's ignition switch recall, she has the support of Wall Street.

In late morning trading on Monday, GM shares were trading down 40 cents at $34.33. Shares are down about 4% since the automaker announced on Feb. 7 that it would recall about 800,000 cars. The news has gradually gotten worse, with more recalls as well as suggestions that the company ignored dangers that it knew existed. The recalls now total 5 million.

GM was a political football long before the recall issue surfaced. While many in the auto industry, as well as many supporters of President Obama, have applauded the bailout and government-orchestrated bankruptcy that saved the company, others -- led by former presidential candidate Mitt Romney -- have condemned it.

Barra will likely confront political opponents this week. She testifies before the House Energy and Commerce Committee at 2 p.m. EDT Tuesday and before the Senate Commerce Committee at 10 a.m. Wednesday.

Barra's testimony "will hopefully be a positive step toward restoring GM's public image," UBS analyst Colin Langan wrote in a note issued Monday. Kelley Blue Book analyst Karl Brauer said Monday that Barra needs to convince Congress that GM has changed, especially in light of evidence that GM knew about the ignition switch problem a decade ago.

"GM's new CEO has shown a consistent willingness to cooperate with government officials while portraying GM as a changed company that won't repeat the mistakes of the past," Brauer said, in a prepared statement. "This is a good approach, and one that's supported by a genuine shift in corporate policy ... If she can convince Congress of these changes it will go a long way in resolving this issue."

Deutsche Bank analyst Rod Lache reiterated his buy recommendation on Monday; he has a $48 price target. "GM is taking a much more aggressive stance on pulling the trigger to recall vehicles," Lache wrote. "At this point the financial impact on GM is impossible to determine. Our buy rating has been based on valuation, and our views on GM's free cash generating ability over time.

"We believe that over time market share and pricing, as opposed to the cost of fines and recalls, will be the critical determinants of GM's stock price performance," Lache wrote. "Even a multi-billion impact may be of secondary importance for GM's stock price, since we do not believe that investors gave GM credit for (its) cash in the first place."

Lache said auto shares tend to price in negative news quickly. In the Toyota (TM) unintended acceleration case, he wrote, share price underperformance "was concentrated around an eight-day period after the floor mat and sticking pedal recall announcements were made" in January 2010. During the period, Toyota underperformed the market by 14%, but the impact was largely gone by June.

He added that so far GM has worked to maintain pricing discipline. On Monday, Bloomberg reported that Chrysler incentives on the Ram 1500 pickup truck are 35% more than Ford F-150 incentives and 46% more than Silverado incentives.

"This newfound discipline after years of matching foes' offers or leading the way in discounting may give investors reassurance that the Detroit-based automaker has learned important lessons of its 2009 bankruptcy," Bloomberg reported. "GM's gross margins in the first quarter may increase more than 20% while Ford's may fall by almost 18%."

S&P Capital IQ analyst Efraim Levy has a strong buy on GM. He upgraded the shares on March 8. In an interview, Levy said he is looking past the recall's impact. "A lot of work is being done at GM to improve profitability," he said. "Launch costs will pressure margins, but they should reap benefits from new launches and from European restructuring in 2015.

"You have to drive the slushy highway of 2014 to get to clearer sailing in 2015," he said.

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

To contact this writer, click here.

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