Get Rich From the General Motors IPO

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Mock GM as "Government Motors" to your heart's content, Fools. (I sure do.) But be aware: This IPO just might be the best investment you ever make -- not in spite of the company's government ties, but because of them.

This week, The Wall Street Journal laid out GM CFO Chris Liddell's boosterish buy thesis on his company in a few short points. The new and improved GM, Liddell says, could earn perhaps $12 billion in annual pretax profits as the North American auto market revives. At its peak, with Americans buying SUVs and pickups hand over fist, GM could earn as much as 50% more than that -- $18 billion, or nearly twice the annual profit Ford (NYSE: F  ) is currently cruising toward. And even after Uncle Sam's IRS takes its due, GM will net somewhere between 7% and 8% margins in an average year, and as high as 9% or 10% in a good year.

Bold words? No doubt. Right now, publicly traded Ford is making do with less than a 5% net profit margin. Troubled Toyota (NYSE: TM  ) gets less than half that, while even Honda (NYSE: HMC  ) gets by on only a 6% margin -- and don't get me started on money-losing Tesla (Nasdaq: TSLA  ) . Little wonder then that GM CEO Dan Akerson declares: "I know a great investment opportunity, and the new GM is just that."

Better than great
It's no surprise to hear the CEO of an IPO take a boosterish tone when describing his stock. It's expected. Yet call me crazy, call me a Fool -- but I actually think Akerson is being modest. "Great" doesn't begin to do justice to how fabulously profitable this company could be … for a while.

Why do I say this, when I've been so consistently critical of the company's promises to pay back taxpayers the tens of billions of dollars we're owed? Why do I buy the bull argument, hook, line, and sinker? Because the numbers demand it -- both the ones GM is bragging about, and the ones the company would probably prefer not to have publicized just yet.

You see, profits aren't even the real story at GM today. What investors should really be interested in are GM's losses -- specifically, the ones GM racked up over its pre-bankruptcy years, as it slouched its way toward Gomorrah -- because, according to a Wall Street Journal article that ran earlier this week, it could be years before GM has to report tax-burdened net profit margins to its investors.

Here's how it works: When the feds bailed out GM -- and Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , JPMorgan Chase (NYSE: JPM  ) , and the other great failures of our time -- as part of the TARP program, they inserted a clause in their agreements helping to ensure that the bailouts would turn a "profit" once the companies were revived. It all has to do with the concept of tax-loss carry-forwards -- credits against losses that the companies had accumulated during the bad years. In its infinite mercy, the IRS agreed that even after emerging from bankruptcy, GM would not lose the right to invoke past losses to offset taxes on future profits it might make. In essence, the IRS gave GM a free pass to earn $45.4 billion worth of profits -- and not pay a dime on any of it.

What does it mean to investors?
The GM IPO can be reduced to the following equation:

$12 billion in pre-tax profits, minus $0 tax liability = $12 billion net profit

So if GM IPOs at its projected $50 billion market cap, the stock will cost barely 4 times its average annual profit (or, at least, what that profit will look like until the tax-loss credits run out). I'll leave it to your imagination how investors will react when they notice that valuation, what with Ford selling for a P/E of roughly twice that today.

Foolish final thought
Now, to address the question posed by the elephant standing in the middle of the board room: "Why is the government doing this?"

Quite simply, it's doing this to make GM look fabulously profitable. To push investors to buy the stock. To guarantee that the IPO is a success. I also imagine that in a few years -- probably right in the middle of President Obama's 2012 re-election campaign -- the government can proudly proclaim the success of the GM IPO and the repayment of "every penny" the company ever owed us.

Fools, when that argument gets made, don't buy it. But do give serious thought to buying the GM IPO. It could be the best investment you ever make.

Ford is a Motley Fool Stock Advisor recommendation, but Fool contributor Rich Smith owns no shares of any company named above.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (26) | Recommend This Article (71)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 06, 2010, at 12:49 PM, liveoilfree wrote:

    The problem with this thesis is that GM has lousy products, a top-heavy overburdened bureaucracy, and is being temporarily goosed by Obama's buying of overpriced GM products.

    As soon as Obama stops directing government agencies to over-spend on GM junk, GM will fall back into despair.

    Ed Whitacre left for a reason: two arguably profitable quarters, and he was able to declare victory and withdraw.

    The mess is left to his successor, who already is blowing smoke. GM is still a company on a downward spiral, with inferior, over-priced products that fail to excite. Prime example is the over-rated Lutz' "work", which produced a sports car, the Malibu and the VOLT, which is just a reconstructed, over-priced Prius.

    No chance for GM; if you buy, you are throwing your money into the sewer.

  • Report this Comment On November 06, 2010, at 1:39 PM, TMFMarlowe wrote:

    Rich: I love it - the cynic's case for the GM IPO. I'm totally quoting you on Monday.

    John Rosevear

  • Report this Comment On November 06, 2010, at 5:05 PM, 4rustin wrote:

    This a LIE>

    GM stinks- don't touch it with a fifty foot pole.

    The unions will bury the company.

    Are they selling enough cars? NO

    What is the car worth after 2 years? NADA

    Let Government Motors be owned by the workers.

  • Report this Comment On November 06, 2010, at 6:44 PM, twinstocks wrote:

    You have git to be kidding, get rich off GM stock. Mind you, a company that had to declare bankruptcy due to bad products, costly labor and poor management.

    GM's IPO will only givre greater strength towards Fords stock, which has a proven track history. And yes I am a Ford shareholder.

  • Report this Comment On November 07, 2010, at 10:13 AM, baldheadeddork wrote:

    This article is another example (see his posts on BA) of Rich knowing how to read a paper but not understanding the company or the business.

    Ford will have huge tax credits to carry forward, too. It's current 5% net profit margin is a distorted number because they're paying down debt, otherwise they would be very close to a 10% net margin. By this time next year (or sooner), their balance sheets will be in line with the rest of the industry and they'll be able to significantly raise their profit margins. And, not by coincidence, the return to high profitability will happen when the auto industry is most likely to return to pre-crash sales levels. They're going to be at their strongest position in decades when the car market is returning to health, too. That's going to be a formidable combination.

    What does the future look like for GM over the next three or four years? It's not as rosy as a couple of lines grabbed from one story would have you believe. GM won't have to pay down debt, but they are deep in the hole on new product development and this is going to be a one-two punch on their profitability. First, over the next few years they will have to invest much more than their competitors in R&D. Second, they (and their dealers) will have to offer greater discounts and incentives on the old models they're making now.

    Nowhere is this more true than in the pickup and SUV market that Rich giddily talks about as the fuel for a potential $18 billion net profit. GM isn't going to have a new truck/suv platform until 2014, when the current GMT900 platform will be seven years old. The 900 is obsolete today compared to the new Ford and Dodge trucks, which is why GM has lost market share in the segment and been forced to offer higher incentives. Both trends are going to get a lot worse as the economy recovers over the next two years, and that will be a damper on GM's profitability.

    This isn't limited to GM's truck lines. There won't be a replacement for the Malibu midsize until 2012 and there's nothing even planned for the next generation Impala full size or the Traverse full size crossover. GM has done a great job of resurrecting Buick, but it desperately needs more models to keep its streak going and they're just not available. Cadillac is on the verge of floundering. They've got two good cars (CTS and SRX) but the rest of the lineup is wandering aimlessly until the ATS arrives three or four years from now.

    And when GM does replace all of its currently obsolete models by 2014, they'll be a year or more behind replacing or doing a midlife refresh on the great new product they have now, like the Camaro, Lucerne, LaCrosse, Cruze, and, well, everything else they've rolled out in the last two years. It will take most of this decade for GM to get back on a normal product development schedule and until they do, their profitability is going to be reduced.

    It's been true forever that the most profitable car company is the one with the freshest products. That isn't going to change, and that company won't be GM for the foreseeable future.

  • Report this Comment On November 07, 2010, at 11:34 AM, belseware wrote:

    DON'T FORGET....

    ...what happened to GM's last crop of equity-holders.

    However, I'd like you to guy this trash, because any repayment of the people's money is better than none.

  • Report this Comment On November 07, 2010, at 1:14 PM, jaketen2001 wrote:


    to your comments, I have also heard that GM realizes that The Volt is already behind the curve, and they are already significantly overhauling it, before the first model year even rolls off the floor--the issue with the Volt is potentially more significant than the others as it 'the' new car, and it seems that it will be a dud already

  • Report this Comment On November 08, 2010, at 12:19 PM, ChrisFs wrote:

    There's a word for people who trash the bailout of GM, wanted hundreds of workers to be laid off due to the 'free market', and then turn around and tout the stock.

    It starts with Hypo and ends with Crite, and it's the problem with a good deal of our country.

    Investors don't want the 'govt interfering with the economy' but are more than happy to take the rewards that result from that.

  • Report this Comment On November 08, 2010, at 2:26 PM, langco1 wrote:

    anyone even foolish enough to consider investing in a disgrace like gm need only look back a year to see how this company treated its past investors and its own dealers!one thing is for sure gm will fail and close....

  • Report this Comment On November 08, 2010, at 2:27 PM, LegalizeMe wrote:

    Fool us once, shame on you. Fool us twice, shame on the investor.

    Crappy company + crappy cars = crappy investment.

  • Report this Comment On November 09, 2010, at 7:08 PM, RumorCentral wrote:

    I heard a credible rumor that GM may enter into an agreement to supply 2M vehicles per year for an undisclosed corporate fleet. That would double their current output. Look for the IPO price to shoot up.

  • Report this Comment On November 09, 2010, at 7:32 PM, TMFDitty wrote:

    @all-decrying-GM-as-a-bad-business-that-makes-bad-cars: I'm not necessarily disagreeing with you here (although from what I've seen the past two years, Consumer Reports and JDPower *do* disagree with you.)

    The point here is that whatever its merits as a business, or lack thereof, the government may not permit GM, the stock, to fail. The Feds have a vested interest, both financial and political, in ensuring that this IPO is a success.


  • Report this Comment On November 09, 2010, at 8:20 PM, NOTvuffett wrote:

    The government spent how much money to bail out GM? a clearly insolvent business. Now it is revealed that they will be exempt from paying taxes on profits equal to their losses as if they didn't go through bankruptcy.

    How is it that just preserving the current tax structure will 'cost us money', when bailouts and tax breaks for GM are 'good for the economy'?

    I would guess that a large portion of the people here had a relative that rode this 'blue chip' down to 0.

    Ford went through tough times too, but they were prepared. They didn't use a bailout, and if they write off losses it is a totally different animal.

  • Report this Comment On November 10, 2010, at 1:54 PM, ddepperman wrote:

    At its peak, with Americans buying SUVs and pickups hand over fist...

    Whea de cash coe fum, bro?

    What is this hand over fist fantasy?

    We mostens be po.

    Where be de jobs to finance the hand over fist?

    If dis enonomy recover, it ony be fo' few yeahs nohow, den go in de soup one mo time, fo good, and wall st banks care not a c**p for the rest.

    See movie, "Inside Job"

    WE need jobs, innovation, new companies, most likely green companies, and the world's arable land and aquifers and fresh water, and oceans's fish are going going almost gone.

    Any of you Fools care?

    GM?n SUvs?

    Hear me laughing?

  • Report this Comment On November 10, 2010, at 3:11 PM, ramboris wrote:

    Any good investor who studies the stock market knows that IPO's usually go downhill after the first day. Whatever the IPO price for GM is you and I wont be able to buy it at that. There are insiders who get to buy way before the public.

    GM is a terrible company, they make terrible cars (I know very knowledgeable people who work in the car industry and they agree with me) and GM will never be a major car company like Ford, Toyota, etc..

    I can guarantee that this car company will fail again unless they make some serious changes.

  • Report this Comment On November 12, 2010, at 5:14 PM, soonernow wrote:

    I took a big hit with GM bonds..After seeing the way GM investors and bondholders were treated in the bankruptcy..with more favorable terms given to the unions than the bondholders in the New GM. I plan to unload the stock I receive in the settlement immediately...whatever the stock is worth..I'm a Ford shareholder and still have Ford

    6.75% bonds( now at $104.00) ..I don't believe in GM products and thus shouldn't be a stock or bondholder in that company..end of story!

  • Report this Comment On November 12, 2010, at 6:40 PM, ChrisFs wrote:

    It's really too bad that this threads are forgotten a week or so after they are written. I would like to hear what each of these posters has to say a year from now.

  • Report this Comment On November 12, 2010, at 8:10 PM, thurston4moore wrote:

    Like the company or not, they netted 2 billion this last quarter. If they can net that kind of money in the economic environment we're in now, imagine what they could be doing in 5 to 10 years when the economy has recovered. I don't like GM either, but the author is right. $30/share is a steal, based on current numbers. There's just too much at stake for this company to fail again. I'd bet they continue to gain market share on Toyota & Honda, not at the rate Ford is going to gain but that doesn't make it a bad investment.

  • Report this Comment On November 13, 2010, at 10:42 AM, TMFDitty wrote:

    This just in: James Stewart at WSJ agrees the stock is a steal -- even without the no-tax kicker. He puts GM's IPO price at 0.3x sales, versus 0.4x for Ford, 0.5x for Toyota, and 0.6x for Honda.


  • Report this Comment On November 13, 2010, at 4:25 PM, ragedmaximus wrote:

    gm to be priced between 26-29 for those that can get in early. who know what it will be when open to public on thursday 11-18-2010. ford is overbought and about to go down a little at 16.30 nearly half of what gm is to be priced and will open. All I gotta say is ha ha ford you thought you cornered the market didnt you. I feel sorry for all the gm investors that invested in america and got screwed once again as usual. I think this new ipo must be a sour taste to those old investors and I'm not sure why any new investor would wanna gamble here due to the history. Who will profit from this other than the govt.

  • Report this Comment On November 13, 2010, at 6:08 PM, INoFoolin wrote:

    GM is an international company, with strong sales and products in China, India and Europe. Take a look at the prospectus. The North American products are mixed, but their Chevrolet, Cadillac, and Buick lines are stronger than they have ever been. Pickups are world class. The restructuring allowed them to shed debt, restructure labor agreements, and reduce capacity so they can be profitable at low volumes.

    I am glad that so many fools have such bearish sentiment, because I may actually get some IPO shares from my broker.

  • Report this Comment On November 13, 2010, at 11:35 PM, susan400 wrote:

    GM with legacy pension , h-care stocks cannot live. They should have done chap 11, 20 yrs ago. Suxbe products, with high cost unions . .

    What do you expect the CEO to say? You took the bait.

    Corporate entities that deserve capital you buy at good values and own them. Those that don’t deserve it, you short, remove capital where it deserves to be. And get paid for doing good work with your capital.

    Objective, fill some inner-need psyche, or be financially responsible.

  • Report this Comment On November 13, 2010, at 11:37 PM, susan400 wrote:

    just might be the best investment you ever make -----------?

  • Report this Comment On November 14, 2010, at 3:53 AM, yosemitebean wrote:

    I have no doubt that GM will come out strong. Its the staying power that I question.

  • Report this Comment On November 16, 2010, at 12:29 PM, LennyLenard wrote:

    It'll be worth holding until the S&P picks it up.

  • Report this Comment On July 09, 2012, at 4:14 PM, MajorBob04 wrote:

    This hasn't worked out very well so far.

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