Is GM poised to break out?

The automaker should benefit from rising industry sales and improving comparisons with Ford, analysts say.

By TheStreet Staff Dec 28, 2010 3:11PM

 General Motors logo © Scott Olson/Getty ImagesBy Ted Reed, TheStreet

 

Wall Street has refocused on General Motors (GM), which seems poised to benefit from increased 2011 industry sales.

 

Since returning to the public markets on Nov. 18, GM shares have traded in a narrow window between $33 and $36. Shortly after midday Tuesday, they were trading near the high end, up 81 cents to $35.41.

 

As the year winds down, the outlook for GM appears positive, both because a rising tide of vehicle sales should lift all boats in the auto industry and because analysts are generally optimistic about the company's prospects.

 

On Tuesday, four analysts initiated coverage of GM, all with buy recommendations and price targets ranging from $43 to $50.

Credit Suisse (CS) analyst Christopher Ceraso set a price of $43. He wrote that GM trades at 3.9 times EBITDAP, or earnings before interest, taxes, depreciation, amortization and pension income, while Ford (F) trades at 5.5 times EBITDAP. He said the gap will narrow as new GM products come to market.

 

"GM's product cycle, while relatively anemic in 2011, will accelerate sharply in 2012 and 2013, about the same time that Ford's product cycle shifts into lower gear," Ceraso wrote.

 

Citibank set a target price of $45 and noted the limited new-product offering for 2011. "With investor expectations seeming rather low for 2011, an upside surprise cold provide a catalyst to the shares," the bank's report said.

Bank of America Merrill Lynch analyst John Murphy also set a $45 price target. Factors in GM's favor include the comparison with Ford cash flow. Additionally, Murphy wrote, after its bankruptcy, "GM is leaner and should be able to generate solid cash flow and ultimately drive value to shareholders.

 

"U.S. auto sales are on the verge of a cyclical recovery, European volumes are not far behind, and emerging-market growth should help," Murphy said. However, shares will have to cope with the overhanging question of when post-bankruptcy shareholders, including the U.S. Treasury, will sell their shares.

 

Meanwhile, Morgan Stanley (MS) analyst Adam Jones has a $50 price target, noting, "We forecast GM to generate nearly $40 million of free cash flow per day over the next five years." Jones wrote: "Finally, GM can worry about revenues, not costs." The company has competitive costs and a strong balance sheet for the first time in 50 years, he said.

 

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