By Jack Hough
Detroit doesn’t have a reputation for producing winning stocks. But when GM on Thursday announced a record profit for 2011 its stock jumped nearly 7% by midday.
Might GM (GM) be a good buy for investors?
The original shares went kablooey when GM filed for bankruptcy in 2009, ending an 84-year run as a member of the Dow Jones Industrial Average. Ford (F), meanwhile, has done less than half as well at the S&P 500 index over the past 15 years.
But if GM is a difficult stock to love, neither is it clearly one to dismiss. During its bankruptcy period, the company reduced the break-even point on its North American business by more than 40%, according to Michael Ward at investment bank Sterne Agee, who initiated coverage on the stock with a “buy” recommendation in December. GM has long been profitable in China.
U.S. demand is recovering. Industry-wide light vehicle sales hit a 27-year low in 2009 of 10.4 million. This past January, sales implied an annualized rate of 13.5 million vehicles, adjusted for seasonality, according to J.D. Power. Before the recent financial crisis and recession, sales of 14 million to 16 million vehicles per year were common.
GM shares also look inexpensive. Based on 2011 earnings per share of $4.58, they trade below six times earnings, even after Thursday’s jump. By that measure, they’re less than half as expensive as the broad U.S. stock market. And GM has net cash equal to more than half its stock market value.
There are trouble spots, however. Profit margins are thin. A big pension shortfall may weigh on earnings for years to come. European operations are losing money. And much of the rebound may have already taken place. Wall Street projects slightly lower earnings for GM in 2012.
All told, GM shares hold allure and the company is stronger than it has been in years, but its continued prosperity is too uncertain to make the stock a worthwhile risk for most investors.
All U.S. taxpayers should want to see shares head higher, however, because they all have a stake. The U.S. Treasury still owns nearly one-third of them, acquired as part of a government bailout. The final cost of the bailout depends on the sale price of these shares, which in turn depends on whether Thursday’s results are fleeting good news or a sign or durable improvement.