GM analysts turn bullish
Despite 15% rise in stock since new EPS targets, some analysts look for more gains.
March 8, 2002: 2:55 p.m. ET
By Staff Writer Chris Isidore
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NEW YORK (CNN/Money) - General Motors Corp. stock has climbed about 15 percent in the last two weeks, since the company raised its earnings guidance and long-term profit outlook, but some analysts believe it's not to late for investors to get in on the stock's resurgence.
The world's largest automaker not only raised its 2002 earnings outlook on Feb. 25 but also announced it will shoot for a record $10 a share profit by 2005, nearly triple the $3.50 a share it expects to earn this year excluding the charge for restructuring European operations as well as the results of Hughes Electronics (GMH: up $0.43 to $15.53, Research, Estimates), the satellite television provider it is in the process of selling.
Then, at the end of last week, GM announced an unexpected gain in February sales. Many forecasts for the company, and results of many competitors, were for a sales drop from year-earlier levels.
The stock closed at $53.11 on Feb. 22, the last trading day before the new guidance, and while GM (GM: down $0.50 to $60.91, Research, Estimates) shares were slightly lower Friday, they still were up sharply from that level.
Analysts surveyed by earnings tracker First Call list a 12-month target price for GM from a low of $45 to a high of $76, with an average target of $65, about 6 percent above current levels.
New profit goal seen within reach
Analysts also differ on how realistic it is for GM to hit its longer-range profit target. Scott Hill, auto analyst for Bernstein who has been a bull on GM stock since he started coverage last year, agreed with GM executives that $10 a share is perhaps even a conservative estimate.
Hill believes $12 EPS should be in reach for GM by 2005. He's one of two analysts with a $76 12-month target price for GM stock, which would be about a 25 percent gain from the current price.
"If overall industry conditions continue to improve, we see them making $7.45 a share in 2003," Hill said. First Call's forecast for next year is for EPS of $5.12, the latest year for which there is a consensus forecast. "That's not assuming massive margin expansion. It's our belief that automotive demand is about a million units higher [for industry-wide U.S. annual sales] than the consensus expectations. That's being proven right as we continue to improve on estimates each of the last four years."
David Bradley, the J.P. Morgan auto analyst who upgraded GM stock to a buy Monday, said that $10 a share figure seems optimistic since it is nearly double his $5.50 a share forecast for 2004 earnings. But he said it still is plausible.
"GM has a long history of poor performance and all of sudden they start doing well. Everyone is forced to ask, 'How much further is it going to go? Is this a flash in the pan?'" said Bradley, who added that most GM bulls find themselves being skeptical bulls. "I'm reasonably happy with what they're doing and how they're doing it. How much the stock is worth, I don't know. Everyone wants to own autos, so this is not a bad one to pick." Bradley's 12-month target price is $65.
Cost savings key to improved profits
The company said that most of the gain in profits would come from cost savings, through both internal cost controls, such as lower payroll, and a lower cost of goods purchased from parts suppliers. Those savings would equal about $5 a share. Another $2 to $3 a share in improved earnings would come from increased North American market share and a continued shift in the mix of GM vehicles to the more profitable light trucks, such as sport/utility vehicles and pickups, rather than cars.
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GM executives said improved cost controls are a key to higher profits, but that it is not looking for union concessions next year. | |
Executives said a return to normal levels of profitability outside North America would increase profit about $2 a share. Working against all these gains is continued downward pressure on new-vehicle pricing, which would cost it about $4 a share.
The company is not calling for any new plant closings or steep cuts in hourly staff, which are virtually impossible under the labor contract that runs through fall of 2003. But the United Autoworkers traditionally hasn't granted concessions at a time of increasing profitability, and GM Chief Financial Officer John Devine told analysts on Feb. 25, "We're not assuming any major givebacks here."
Health-care costs a major issue
Still, Hill said, the company could see some major savings on health-care costs, which he predicted would be the key issue in the 2003 talks. UAW members and retirees currently pay nothing for their health care insurance. The retirees retain the same insurance as active employees until they become eligible for Medicare, at which time they continue to get a company-paid supplemental insurance plan.
The traditional Big Three -- GM, Ford Motor Co. and DaimlerChrysler's Chrysler Group - are at a competitive disadvantage compared with Asian and European automakers that are building plants here primarily due to the health-care costs for retirees, Hill said.
The hourly pay of those "transplant" auto plants is only a few dollars less than UAW pay scale at the Big Three. But the retiree health-care costs have virtually doubled the hourly labor costs the Big Three face, while their competitors have few retirees and much less expensive health-care plans.
GM pays $4.2 billion a year in health-care costs a year, with 713,000 of the 1.2 million people covered being retirees or their dependents. Hill said that if Congress agrees to a prescription drug benefit for Medicare, GM would be the biggest winner in the country, since the unions could agree to lower their employer's costs without hurting members.
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The company figures show GM paid $1 billion in prescription costs alone last year, with well over half of that going to retirees and their family members.
"It'd be the beautiful solution for both GM and UAW," Hill said. 
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