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Banks in GM's IPO Bullish on Outlook

December 29, 2010
4 min to read


General Motors Co. won high marks from major Wall Street banks Tuesday as they touted overseas growth and a made-over balance sheet as reasons to buy the car maker's stock.


In a series of bullish reports from banks involved in GM's initial public stock offering last month, the analysts predicted GM shares would hit anywhere from the low $40s to $50 within the next year. GM stock has been trading in the low- to mid-$30s and closed Tuesday at $35.32 in New York Stock Exchange trading, up 72 cents, reported by The Wall Street Journal.

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Sharon Terlep explains why Wall Street is optimistic about the future of General Motors.


But even the most optimistic prediction would have the U.S. government losing money on its $50 billion bailout of the auto maker last year. To break even, the U.S. must sell its remaining GM shares at around $53 each.


The reports come as GM and its stock underwriters are increasingly optimistic that the Obama administration will sell most or all of its remaining stake next year, rather than offloading shares gradually over the next few years. The U.S. Treasury reduced its GM stake to about 33% from 61% in the $23.1 billion IPO.


Before the IPO, GM Chief Executive Daniel Akerson said he had expected the Treasury could take several years to sell its stake. Banks underwriting the stock sale and GM executives would prefer to see the government cut ties with GM more quickly, and Obama administration officials warmed to the idea after the IPO went better than expected, according to people familiar with the matter.


The U.S. would take a loss on the GM bailout if it were to sell its stake when shares are below $53. At $45 per share, for instance, the government would lose around $4 billion. But U.S. Treasury officials are said to be open to taking a small loss if it means cutting ties with GM— and distancing the government from the unpopular bailout.

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Tuesday was the first day that the 35 Wall Street banks that underwrote the IPO were permitted to comment on GM's prospects under terms of a 40-day "quiet period" established by the stock sale.


The Treasury can't sell more shares until May under terms of the IPO. It is likely the administration would wait at least a few months after that to sell, in large part because holders of old GM bonds—who own 10% of the new GM's stock—also would be able to sell their stake next spring and administration officials would prefer space between the two sales.


Ron Bloom, the Treasury's point person on GM, said last month that the administration's decision to shed a larger-than-expected block of shares in the IPO "gives you a tangible demonstration that we are serious about exiting as soon as practicable." But he declined to speculate on whether the U.S. would sell its remaining stake in 2011.


Not surprisingly, the analysts Tuesday painted a broadly favorable picture of the restructured company that their firms helped return to the stock market.


"GM may be the most compelling 1-3 year auto turnaround story in our universe," Citigroup analyst Itay Michaeli wrote.

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The common advice they gave investors: buy the stock before it may be boosted by the U.S. vehicle market fully rebounding and before model launches like the revamped Chevrolet Malibu in 2012 and a major redesign of GM's pickup trucks and sport-utility vehicles in 2013 may boost sales.


The optimism is tempered by some risks. A weaker U.S. economy could damp GM's turnaround, though most analysts seem unconvinced that a double-dip recession is likely. For the longer run, analysts said it is too soon to tell whether GM management will be able to fully capitalize on advantages won through bankruptcy, such as shedding billions in debt as GM cut unprofitable brands and factories.


Analysts still see GM stock trading at a discount to rival Ford Motor Co., the only U.S. auto maker to avoid bankruptcy.


GM's product line is a key concern. The company slashed spending on new products in 2008 amid its descent into bankruptcy. Those cutbacks are just beginning to show up, with GM facing a gap in U.S. product launches in 2011. That means it could face problems luring customers next year. GM's product portfolio is "not yet firing on all cylinders," Morgan Stanley analyst Adam Jonas wrote.


In a statement, GM said its product plans globally are strong and that it is optimistic about recently released or soon-to- come-out U.S. models.

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Money managers say it is common for analysts who work for an IPO's underwriters to issue upbeat reports, in spite of reforms adopted in 2003 that were meant to bolster analysts' objectivity. "I would be astounded if they were anything but bullish," said Jack Ablin, chief investment officer at the Harris Bank unit of BMO Financial Group, which didn't underwrite the IPO or buy shares in it.

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