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By Jeremy Glaser | 11-17-2010 11:19 AM

General Motors Is Ready to Start Printing Money

Morningstar's Dave Whiston thinks the new and improved GM is going to be a formidable cash flow generator when auto demand rebounds.

Jeremy Glaser: I'm Jeremy Glaser with GMs IPO has been raising a lot of excitement in the investor community. I'm here today with Dave Whiston, Morningstar's Auto Analyst, to take a closer look. Dave, thanks for taking the time today.

David Whiston: Thanks Jeremy.

Glaser: So let's start off kind of big picture, what's happening with the auto industry and how is the new GM playing the role in the auto recovery?

Whiston: Sure. GM in the United States has a leading market share about 19% Ford has certainly gained quite a bit this year Toyota is taking a step back with the recall crisis, and you've got some rising stars in industry, in particular Hyundai. The overall industry that I think definitely hit a bottom in 2009 when U.S. vehicle sales were 10.4 million. That was the lowest per capita sales year ever going back at least through 1951.

We're probably going to head about 11.5 million, maybe a little more and recently the data has actually gotten better. The gain in October, the year-over-year gain in retail sales was actually better than fleet sales. It was the first time retail really drove the increase compared to fleet sales and that's a really good sign for the auto industry.

Glaser: So what has GM done since its bankruptcy to align itself better with this lower level of demand?

Whiston: GM now really is -- it is the new GM. I really trust the people. They should not anchor to the prejudices and biases they had of old GM and some of which weren't fair, but there is certainly a lot of problems with the old company. All that's gone now. The VEBA, the UAW's retiree health care fund is in place now; that saves GM roughly $3 billion of cash a year. The hourly labor costs now in the U.S. are $5 billion. Five years ago, it was $16 billion. That's a monumental difference.

So between actions like that cost cutting, some plant closures, of course, are streamlining the brands to four core brands in the United States from eight. Now, GM in North America, they can breakeven at an industry sales rate or what we can call SAARs, seasonally adjusted annualized selling rate, of 10.5 million to 11 million vehicles industry-wide being sold in the U.S. Just three years ago, they needed 25% share and 15.5 million vehicles industry-wide. That's a monumental difference.

Glaser: So even we hit the lows that we saw in 2009 again the new GM would still be able to breakeven?

Whiston: Absolutely. Management says it quite well. GM is now structured to breakeven at the bottom of an economic cycle. You really couldn't ever say that about old GM for quite a long time.

Glaser: Then what's your view of the company going forward then?

Whiston: Well, as readers know from our November 4 report, I'm quite bullish on the stock on the IPO. The fair value is currently $44 a share. There will a new report out on the site, once the stocks starts trading. Again, if you buy my argument that 2009 was a bottom in auto sales and you understand how dramatically different GM's breakeven point is now, they are going to be printing money as auto sales come up. We're still scrapping more vehicles than we sell in the United States. That's not sustainable, because if they were, we'd eventually have zero cars on the road and obviously that's not realistic. So, I'm quite optimistic about the new GM as you can tell.

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