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A Year After IPO, Uncertainty Shades GM’s Future

It’s been a year since, General Motors (GM), after being mired in bankruptcy, debuted its highly anticipated IPO.  General Motors raised a record $23.1 billion with partial funding from U.S.

It’s been a year since, General Motors (GM), after being mired in bankruptcy, debuted its highly anticipated IPO.  General Motors raised a record $23.1 billion with partial funding from U.S. tax payers, a massive effort that helped resuscitate the Goliath automaker.

At the time of the deal, President Obama, who was strategic in providing the company with massive cash for a bailout, called the IPO a “major milestone in the turnaround of not just an iconic company but the entire American auto industry.” He added that, “Supporting the American auto industry required tough decisions and shared sacrifices, but it helped save jobs, rescue an industry at the heart of America’s manufacturing sector and make it more competitive for the future.” Investors, perhaps more hopeful about a full recovery during late 2010 than they are today, leapt at the opportunity to invest in the IPO, causing it to jump to $33 per share and reducing government ownership from over 60 percent to around 33 percent.

Now, a year later, their confidence that GM would once again return to its former dominance, has proven only slightly misguided. General Motors has reclaimed its title as the number one automaker in the world, after losing it to Toyota (TM) in 2008 amidst a tumble toward bankruptcy. While a return to number one would seem to symbolize the resurgence of American auto dominance, it’s worth noting that Toyota’s sales were weakened by supply chain problems and damages to its factories following the nuclear disaster in Japan.  Certainly, the limitations on vehicle production were at least partially responsible for the difference in sales during 2011.  Through September, GM has sold 6.79 million vehicles, beating Toyota by over 1 million.

The number of cars being sold is improving, even if Toyota’s struggles have contributed to the more impressive sales. Overall, revenue increased by 7.6 percent, reaching $36.7 billion from $34.1 billion a year earlier. Quarterly profits; however, sunk 15 percent, even as sales improve. The earnings report led shares of GM lower by 10 percent.  Shares of GM have declined by over one-third since its IPO debut last year and have continued to trade at a lower ratio than competitors like Ford, which sells at 7x earnings and Toyota, trading at 14.3x earnings. Ford was the only major U.S. automaker to decline a bailout in 2009, a decision that has seemingly assured investors of the company’s long-term strength. Considering that in the year since its IPO debuted GM has made some major strides forward, it’s difficult to paint the IPO as a failure in spite of its falling price.

Looking forward, General Motors is working to improve its margins, which could help it regain the more than 38 percent its share price has lost YTD. The company’s CEO Dan Akerson, is focusing on cost cutting, in spite of some of the most impressive financial reports in two decades. With current profit margins at six percent, GM continues to trail the 7 percent earned by Ford and other competitors. GM will try to close this gap, and among other things, cutting the number of vehicle architectures by more than half over the next six years. Furthermore, GM is looking to slice the number of engines in its vehicles to 10 from its current level of 16 in order to obtain margins more inline with industry standard.

To say that General Motors is out of the muck, though, would be to ignore major factors like its declining share price, a global economic slowdown and the potential of European debt contagion. Analysts across the board have been lowering their expectations for top retailers, especially automakers. Car buying tends to be closely connected to consumer confidence levels as people tend to be unwilling to make major purchases during periods of economic fragility. Uncertain also is the role General Motors will play in the green revolution. The Chevy Volt has been far outsold by the company’s external combustion option, the Cruze, and many are wondering how GM will fare if and when electric and hybrid cars become the new gold standard.

Assessing the company today, one year after its IPO, leads to more questions than it does answers. Progress has been made and the company is once again the number one car maker by the numbers, but a range of variables are at play that threaten to derail its strength. Add a newly revised flat outlook over 2010 and determining GM’s direction becomes even more of a struggle. Perhaps the company’s Chief Financial Officer said it best during General Motors’s most recent earnings report last week:

“What we are looking at is an increasingly challenged economic environment going forward with a lot of uncertainty.”

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