Should you invest in GM?

By Chris Isidore, senior writer


NEW YORK (CNNMoney.com) -- Will General Motors, the hottest IPO on Wall Street, be a good long-term bet?

The company's initial public offering Thursday is set to be the largest IPO in history, selling about $20 billion in common and preferred shares.

Strong investor demand led the company to increase both the number and price of shares being offered, boosting the overall IPO size from about $13 billion in the last two days.

But the question for investors is whether the century-old behemoth, just 16 months from a federal bailout and bankruptcy reorganization, can achieve the kind of growth that rival Ford has recently.

Ford Motor's stock (F, Fortune 500) has returned 65% since the start of the year -- more than ten times the value of its low point in early 2009.

Ford has been praised for being the only U.S. automaker to avoid a bailout or bankruptcy. It has been gaining U.S. market share with attractive and critically-acclaimed new models.

"Ford has done everything right. They've had the Midas touch the last couple of years," said Peter Bible, head of the public companies division of the accounting firm EisnerAmper, and a former chief accounting officer at GM.

But some experts believe that GM, Ford's larger and better-positioned rival, has the potential to do even better.

Leaner, meaner GM

One thing likely to help both GM and Ford are forecasts for a rebound in U.S. auto sales next year of between 10% and 12%, and continued gains going forward.

But GM is in a better position to take advantage of that growth because its reorganization and new labor contract left it with a leaner cost structure and balance sheet.

Because Ford avoided bankruptcy, it has roughly four times as much debt as GM.

In the third quarter GM posted its biggest profit in 11 years -- nearly $2 billion -- despite weak U.S. car sales that remain well below pre-recession levels.

Its profit even topped that of Ford in the quarter, although the company cautioned it would report significantly thinner margins in the fourth quarter.

But if domestic auto sales start to come back, GM is positioned to reap the benefits.

"The structural cost reduction has been truly amazing," said David Cole, the chairman of the Center for Automotive Research, a Michigan think tank. "You're going to see profits we have not seen before."

Institutional investors have been bullish enough on the stock to lead GM to raise its price target for the offering, to between $32 to $33 a share from its original estimate of $26 to $29.

Kirk Ludtke of CRT Capital, one of the few to give an estimate for GM stock, sees it hitting $45 a share within six months, which would work out to about a 72% annual return from even the upper end of the IPO price range.

International appeal

GM has another edge over its U.S. rivals -- strong overseas demand, especially in China, which is now the world's largest market for auto sales.

That could translate into both better sales and stronger stock prices as overseas investors eye GM shares. GM's Chinese partner SAIC Motor, is weighing whether to buy a minority equity stake in GM.

"They're in position to attract that investment because of their position overseas," said Rebecca Lindland, director of strategic review of IHS Automotive.

And Ford's success of the last year has meant that its stock has become awfully pricey, especially compared to GM's IPO target price. Ford closed Tuesday at $16.51, close to the consensus 12-month target price of $18 according to analysts surveyed by Thomson-Reuters.

A lower price-to-earnings ratio for GM shares, about 11.5 based on the annualized earnings so far this year, compared to 20 at Ford and 18 at Toyota, could make it very attractive to investors, said Francis Gaskins of IPOdesktop.com.

But Gaskins cautions investors against jumping into GM stock too early. GM won't be able to pay a dividend until it gets rid of its government ownership stake, which could take years, Gaskins warned.

And he said many institutional investors still aren't convinced that GM has changed the corporate culture that got it into trouble in the first place, despite improvements in its cost structure.

"There are a lot of people on Wall Street who won't touch it. It's a question of whether the leopard has changed its spots -- is it the same old company that went downhill for years?" To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Index Last Change % Change
Dow 16,930.27 -30.30 -0.18%
Nasdaq 4,431.91 -17.65 -0.40%
S&P 500 1,973.94 -4.40 -0.22%
Treasuries 2.49 0.02 0.73%
Data as of 12:27pm ET
Company Price Change % Change
Dollar Tree Inc 55.50 1.28 2.36%
Facebook Inc 74.78 -0.41 -0.55%
Apple Inc 98.21 0.54 0.55%
Family Dollar Stores... 75.20 14.54 23.97%
General Electric Co 25.57 -0.22 -0.85%
Data as of 12:12pm ET

Sections

After ending string of operating losses last year, Virgin America says it plans to sell stock. More

Is the economy back on track after a weak first quarter or about to get blown away? Investors will find out when the curtain is drawn on jobs and GDP data. There's also a Federal Reserve meeting. More

Actor-founded This Bar Saves Lives had Hollywood connections, but learned Start-Up 101 the hard way. More

Americans with disabilities face huge financial hurdles and it starts early on, according to a recent report. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.