Stock of the Week
NYSE Symbol: GM
Industry: Auto sales.
Price as of 11/17: $34.26
The major averages put in a nice bounce following a week and a half long sell off. The averages traditionally perform well heading into Thanksgiving so at least we have that going for us. One sector that performed great all week was the retailers. Plenty of good earnings reports from that sector modes well for the holiday season. The restaurant stocks have been on fire, but the big news of the week was the IPO of General Motors. General Motors is back from the brink thanks to a bailout from the Federal Government when it was renamed Government Motors. Thanks to the bailout while in bankruptcy, GM was able to rid themselves of most of their debt and further cut costs to get lean and mean. Fast forward to 2010 and GM is making a lot of money once again allowing for the public offering. Now that the company is public once again, the question is whether the stock is a good investment?
At first blush, GM's stock looks cheap. The IPO created a little more than 500 million shares so the market cap is below $20 billion verse Ford's market cap of $56 billion. GM has already made $4 billion dollars this year which translates into a PE around 6 times earnings. Pretty cheap, but the share count will be go up and may go up significantly in the future. So with more shares outstanding the stock can quickly go from undervalued to overvalued without the stock moving at all. Remember the government still has hundreds of millions of shares to sell and the company is expected to announce a secondary offering of their own to raise more capital. Having said that, GM did get an upgrade on Friday with a $45 price target. CNBC's Jim Cramer likes the stock below $34 a share and would take profits if it quickly jumped to $40 a share. However, everyone should know Cramer changes his mind literally every day.
Rival Ford is similarly priced trading for 7 times earnings. Many of the Wallstreet pundits like Ford over GM based on their management team that didn't need a bailout, their low cost structure which should boost profits in the future, and their line of cars which have been well received among consumers.
One thing is certain the auto industry has changed for the better. The GMs and Fords are making a lot of money once again on all cars and trucks and the future for auto sales look bright. Currently auto sales are running around 11 to 12 million units a year. The industry expects sales to pick up over the coming years to a range of 13 to 14 million units. That means more profits going forward for a once defunct industry.