Will Taxpayers Ever Make Back Their Money on GM? Uh, Yeah

Last Updated Apr 4, 2011 5:12 PM EDT

Skip a packet across the Internet and you're practically guaranteed to come across someone loudly proclaiming that General Motors (GM) will never be able to pay back the nearly $50 billion in bailout loans the company got from the feds before entering bankruptcy in 2009. Most combine negative analysis with more a healthy dollop of moral persecution -- as in, there's no way GM can sell enough cars to overcome the damage it did to free-market capitalism.

Unless, of course, it can.

GM now owns 20 percent of the North American market, a far cry from its heyday, when it built every other car sold in the U.S. Still, if the recovery in the auto industry continues -- and if an eventual recovery in the construction trades accelerates sales of profitable full-size pickup trucks -- GM will capture 20 percent of 16 million in yearly new car sales.

The millions eventually add up
That's 3.2 million vehicles, and assuming an average profit per vehicle of something like $3,000, it adds up to a yearly profit on vehicles sales of $9.6 billion. (For reference, GM made $4.7 billion in 2010, and lost $21 billion in 2009). Also bear in mind that GM is both dedicated to keeping its balance sheet as debt-free as possible and has been restructured to make money in a U.S. market that could once again drop to 10 million vehicles sold annually.

Results like this could easily double GM's IPO price of $33 per share, taking it into the $60-70 range. At which point the company would be approaching a market cap of $100 billion, providing an easy opportunity for the Treasury to sell what's left of it's original $50 billion stake in GM for a handsome profit, depending on when it decides to pull the trigger (a gradual sell-off of its 60 percent stake is obviously the game plan). This, by the way, would be a real payback, not a stealth payback of the type that former GM CEO Ed Whitacre got clonked for last year.

Can GM really get its market cap that high?
It's been difficult to compare GM with Toyota (TM) in the past, because Toyota's rise to the top of the global automotive mountain seemed inevitable. However, its struggles with the recall crisis of 2010 and its recent management shakeups have occurred against a background of precipitously declining U.S. market share, which now resides below GM and Ford (F).

Toyota's market cap is $137 billion, more than double GM's. This makes no sense and would lead rational minds to conclude that, although critics can carp all they want about GM being priced slightly lower than its IPO price, there's plenty of unrecognized upside to the stock. Worth noting is that institutional ownership of GM is only one-third. For comparison, General Electric (GE) is more than half. GM is poised to become a solid holding once again.

Bailout payback will be a reality by 2015
Toyota will have to spend a lot of money and relinquish plenty of profits to get back its lost U.S. market share. GM, on the other hand, could ride the recovery to a 25 percent share, although that would likely require more aggressive incentives on new vehicles. For the next three to four years, maintaining a 20 percent share should be adequate.

I should point out that the rough valuation I've outlined aligns with the pre-IPO value that former auto czar Steve Rattner assigned to the company. He was ahead of the curve, however, and as The Truth About Cars rightly insists, the correct value of GM currently is more like $50 billion, not $90 billion.

But I think there's a very good chance the curve will arrive. Mind you, I haven't even considered a GM valuation based on growing its operations in Asia and Latin America, nor whatever it will make when it (probably) sells its common equity stake in Ally Financial (formerly GMAC, GM's captive lender), nor what it will make on auto loans through its own lender, GM Financial. The way it looks to me, GM will have paid it all back by 2015.


Photo: GM Media