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GM Stock Off to a Decent Start, but the Road Ahead Is Long and Foggy

General Motors stock (GM) closed at $34.19 Thursday in its debut on the New York Stock Exchange. That was up from the $33 price set in GM's initial public offering but close to the day's low and well below the high of $35.99 reached early in the session. It's too early to tell whether buyers in the IPO or in the first hours of trading on the open market are getting their money's worth, but there are reasons to be wary.

The sale, which is expected to raise $22.7 billion, valued GM at about $50 billion and allowed its largest shareholder, the U.S. Treasury, to recoup a sizeable chunk of the investment it made over the last two years to rescue the carmaker. It left the government with roughly a 26 percent stake in GM, which filed for Chapter 11 bankruptcy protection in June 2009 and emerged from the process a month later.

GM reported earnings of $2.62 per share for the first nine months of 2010, including $1.20 for the third quarter. Comparisons with 2009 are impossible, as the company was heading into, going through or coming out of bankruptcy. With the new GM still a work in progress, it will be hard for several more quarters to attach much meaning to the financial figures it reports or make useful predictions.

GM said as much in its latest quarterly filing with regulators, saying about the fourth quarter that "...any forecast of our operating results is inherently speculative, is subject to substantial uncertainty, and our actual results may differ materially from management's views."
What the company did forecast was hardly encouraging: "We expect to generate positive [operating earnings] in the fourth quarter of 2010, albeit at a significantly lower level than that of each of the first three quarters, due to the fourth quarter having a different production mix, new vehicles launch costs (in particular the Chevrolet Cruze and Volt) and higher engineering expenses for future products."

Let's assume based on GM's statements that the company earns $3 a share for the full year. That would value the stock at 11 times earnings based on the IPO price. Ford (F), by contrast, a company that has more transparent, predictable results and has made it through the recession without having to be rescued, trades at less than 9 times earnings.

The following material is from a post written Wednesday, after GM's announcement setting the IPO price:
The $33 share price reflects strong investor demand and is considerably higher than the price range of $26 to $29 being discussed just a few days ago. Assuming the anticipated number of shares is sold, the IPO will be the largest in history, surpassing the $22.1 billion raised earlier in 2010 by the Agricultural Bank of China and the $19.7 billion that Visa raised in 2008.

GM appears to be doing well out of the deal, but what about the throng of new shareholders that the company will acquire in the next few days? Time will tell, but keep in mind that it's a bit of a misnomer to call the share sale an IPO.

A new corporate entity emerged from bankruptcy in 2009, but GM's real IPO occurred before World War I. The stock was first listed on the NYSE in 1916 and became perhaps the most important market bellwether for the next half-century.

After that, however, the dominance of GM and its stock eroded, and the deterioration gathered pace as the 21st century arrived and it became clear that the company, its management, labor practices and ultimately its cars were trapped in the 20th. How the stock - the one being created, not the one that vanished with barely a trace in 2009 - performs depends on just how new the new GM really is.

If the company proves that it can make vehicles that are at least a match for Ford and numerous rivals in Japan, Germany and emerging economies like Korea, then the stock may be a solid performer. But with such a spectacular legacy of failure to live down, and with an economy that has done some spectacular failing of its own in the last few years, caution toward GM is warranted.