Last Thursday, the resurrected General Motors (GM: Charts, News, Offers) drove its IPO onto Wall Street at $33 per share, which was estimated at less than eight times its trailing 2010 earnings. Less optimistic analysts claim that at $33, it actually trades at 11x earnings. As anticipated, trading on Thursday was volatile as the shares searched for true value under heavy volume, and Friday trading was flat at a mere dollar above its IPO price. Did GM’s IPO fizzle out before it even got started, or is it waiting for patient investors to hop aboard and ride it up to its true value of $44, as estimated by Morningstar.com?
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GM is one of the oldest DOW components, listed on the NYSE for nearly a hundred years. The brand, often nicknamed “Detroit Steel,” was the face of well-built American vehicles which could last for decades at a time, and symbols of entire eras of American history. However, cheaper, well-made Japanese cars entered the market in the 1970s-1980s, striking hard and deep into the American market and bringing about the first declines of the Motor City. General Motors still ambled along well enough until the 2000s, when a backwards business model focused on large gas-guzzling vehicles backfired and nearly ruined the company. The downturn, which started in 2006, was exacerbated by the financial crisis of 2008. During this time the company poured over $80 billion down the drain, and its already fragile business model crumbled. As the federal government bailed out bank after bank to vehement public outcry, General Motors’ executives flew to Washington as well, fresh off their private jets with tin cups in hand. The company claimed that its bankruptcy would cost 200,000 jobs at GM and drag Ford (F: Charts, News, Offers)under as well, due to its massive impact on the parts suppliers which also feed Ford.
In what seemed like an unbelievably socialist and unconstitutional measure, the government bailed out GM with a $50 billion investment and became the majority shareholder. It ordered massive cuts and restructuring, and the company, nicknamed by critics as “Government Motors,” returned to profitability. On Thursday, the IPO launched at $33 per share, with most small investors locked out of shares. This was due to a conflict that General Motors had with one of the underwriters of the IPO, UBS, whose analyst leaked a memo criticizing the offering at length to the press. In retaliation, UBS and a series of dependent banks and brokerages, including E*Trade (ETFC: Charts, News, Offers), TD Ameritrade (AMTD: Charts, News, Offers) and Charles Schwab (SCHW: Charts, News, Offers) were denied shares. It wouldn’t matter much, as the stock’s price floated above IPO price for most of its first two days on the market. The government instantly unloaded $14 billion of stock at $33 per share, but unless GM stock rises to $53 per share, which is the break-even point, the Treasury still stands to lose money on this bailout. However, with a trailing P/E of between 8-11, the stock should rise eventually, considering that the economy has been slowly improving every quarter.
A new variable, China, has also entered the picture. GM expects sales in China to increase by 15% next year, up to 2.3 million vehicles, as demand increases. Like many other American companies, it hopes that its Chinese sales help offset domestic stagnation. Kevin Wale, GM’s China President, stated, “The underlying strength of the Chinese vehicle market is very strong.” GM is currently the number one overseas auto maker in China, aided by government subsidies. China’s top automaker, SAIC Motor Corp, has purchased a stake 0.97%, or $500 million USD, stake in the company prior to its Hong Kong IPO, continuing a growing partnership in the country which began back in 1999 with the formation of Shanghai GM. This is further evidence of China’s intent to become a major player in international auto sales, as the Chinese automaker Geely bought out Ford’s Volvo unit for $1.5 billion back in August.
General Motors has promised change and a forward-thinking business model. Its new Chevy Volt electric car is intended to be a symbol of this change, as it seeks to compete with Toyota’s (TM: Charts, News, Offers) eleven new hybrids for 2011. With such a huge backing from the government, General Motors is sure to be on its best behavior for the time being, and the downside risk is low. As evidenced by the government’s heavily biased prosecution of Toyota for its recalls, the company has a wide safety net to fall back on should times get tough again.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
A reorganized brand portfolio for GM to go with the reorganized company.
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Why do you call the GM bailout “Unconstitutional”?
I’ve read the Constitution and nowhere does it make a statement about economic systems to be followed or limit the government’s ability to do these. I’ve worked for both companies and I’ve read a lot af literature about the Chrysler bailout. Nobody called that either socialist nor “uncostitutional”. What the current administration did at GM was a very correct move. We’ll have to wait and see if it works.
It’s unconstitutional in that the Fifth Amendment states that private properties seized by the government must be repaid with “just compensation”. For the GM IPO to reach “just compensation”, or break-even, the stock price must reach $53 or above. This is highly speculative, and not just compensation, and American taxpayers are footing the bill.
It is unconstitutional because the 10th Amendment specifically lists powers granted to the federal government, and is also explicitly states that any and all powers not specifically granted to the federal government are reserved to the States and/or to the People.
Just because government officials, both elected and unelected, have usurped power by acting as if they had a constitutional right to take an action does not make that action constitutional simply by virtue of their act or by heir saying it is within their scope of powers.
This is a dangerous precedent that has been tolerated far too long and it must stop. It is also NOT limited to one political party as GW Bush was as guilty of it as is the current administration, though not to the same extent.