GM Charges Back, Leaner and Greener

02/01/2011 3:17 pm EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

The automaker’s shares have broken out of their post-IPO range as sales and earnings prospects brighten, writes Michael Cintolo, editor of Cabot Top Ten Weekly.

General Motors (NYSE: GM) hit some major speed bumps during the Great Recession, but has rebounded nicely in the last several months. After climbing back from a bailout by the US government, the company had its stock re-listed in mid-November.

GM announced at the recent Detroit Auto Show that it plans to produce more plug-in hybrid vehicles based on its Chevrolet Volt. Initial estimates show that General Motors could build 25,000 Volts this year, more than double its original estimate of 10,000 vehicles, indicating that demand for plug-in hybrid vehicles is growing. The Volt was even named the North American Car of the Year at the auto show.

General Motors may trace its roots back more than a century, but all for intents and purposes it's an entirely new company (albeit a very large one, with about $140 billion in annual revenue). Gone are the Saturn, Saab, Pontiac, and Hummer brands, as well as loads of debt and some commitments to the union.

And being combined with that leaner corporate structure is a big pickup in business as the auto sector recovers from the Great Recession (annual auto sales dipped to their lowest level in 30 years in early 2009). Sales for GM's core brands were up a big 16% in December, and management expects sales to continue to chug along this year. [GM has just reported a 23% sales gain for January, and a 36% increase in sales to individual buyers—Editor.]

We also like the recent news that GM will be selling its OnStar system at retail for installation in any car, a smart move. Earnings are expected to reach $4.20 per share in 2011, up from less than $3 per share last year, but even that projection could be mightily conservative, as any spike in sales is likely to fall right to the bottom line. We think this is a big turnaround story with legs.

GM came public in mid-November and proceeded to etch a tight six-week IPO structure between $33 and $36. The breakout came during the last week of 2010, and the buyers hadn't let up until Ford Motor (NYSE: F) posted disappointing earnings last week—shares have advanced nine days in a row at one point on big volume as institutional investors built positions.

Is GM going to double or triple from here during the next couple of months? Almost certainly not. But we think big investors will be accumulating shares on any weakness as business improves.

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