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General Motors Is Ready to Start Printing Money

Jeremy Glaser

Jeremy Glaser: I'm Jeremy Glaser with Morningstar.com. 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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Glaser: One of the controversies surrounding General Motors is that it's been called government motors that investments from the U.S. Treasury and from the Canadian government and from the VEBA is seen as a negative by some investors and obviously they will be selling a big stake in the IPO. How do you view the government's stake in it as a potential investor in GM?

Whiston: Well, obviously this is not a typical IPO, very controversial and certainly unique or at least rare to have government ownership in a company that's going public. Obviously every investor has to decide their own comfort level with that. My opinion is that, of course, it's an overhang, but it's an overhang on the stock or a drag on the stock and that's temporary.

Contrary to popular opinion, I don't think President Obama is a socialist. I don't think the U.S. government has any interest in owning GM, any longer than they have to; ditto with the Canadians, both the Ontario government and the Federal government up there.

It's just a matter of you can't sell all of the stake at once. It's excess supply in the market and that could drag down the shares, and obviously, ideally you want to made whole, or even make money on the deal as a tax payer. So you have to IPO now. You have to offer discount to investors to come in and then over time, I'd be looking for the governments to sell their stakes off as the stock goes up.

Now, of course, that means the stock has to go up for that argument to play out, but I think it will, due to the recovery in auto volumes, sales volume that we discussed previously.

Glaser: So, certainly more of a potential of being a short-term issue than really a long-term issue for investors looking to hold it for a while?

Whiston: Absolutely, and that's why I have been so optimistic about this deal. Initially, they were looking at prices staying at $29 and I thought, wow, that's free money. Even it looks like we'd probably see about a $33 price now and even there I think, the shares are attractively priced, though probably not a five-star call.

Glaser: Now, if you look at some other investors who have expressed interest in GM, the Chinese look like they're going to take about a 1% stake in the company. What do you think the impact of that is? Is that more of a goodwill gesture? They want GM to continue to produce in China or do they really see that as a confidence of the financial strength?

Whiston: Yeah, it looks like that investment is coming from SAIC or Shanghai Automotive Corporation, which is a key joint venture partner of GMs in China. So, I think it's actually –obviously those tax payers are getting angry that a foreign automaker will be coming in and taking a stake, but you have to look it at more from a sound business principle issue and GM and SAIC are partners. They operated in China a lot, and they are actually expanding their JV operations to India to go after small car segment. So, if GM and SAIC have this common interest, common incentives to succeed, I don't see a lot of concern there with a 1% stake.

Glaser: So, it's a deal that makes sense for you?

Whiston: Right, I mean ultimately if you are not comfortable with the way this deal has been laid out in the bankruptcy process. Again, every investor has to do what's right for them, but just stick to the sound fundamental analysis and do your homework and look at where auto sales are going and look at how the new GM is set up in terms of its cost structure and really the stock looks pretty good to me.

Glaser: It's about cash flows, it's not politics.

Whiston: Absolutely.

Glaser: Alright, Dave thanks so much.

Whiston: Thank you.

Glaser: For Morningstar.com, I'm Jeremy Glaser.