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
Bold words? No doubt. Right now, publicly traded Ford is making do with less than a 5% net profit margin. Troubled Toyota
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
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.
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