Sizing Up GM as It Gets Ready for Its IPO

In advance of General Motors' Nov. 17 initial public offering, Chief Executive Officer Daniel F. Akerson, Chief Financial Officer Christopher P. Liddell, and four other executives have been on the road chatting up investors—and making some ambitious projections.

GM says it could reach operating profits of up to $19 billion if the U.S. market returns to near-record annual sales levels of 17 million vehicles, according to two people familiar with the company's presentation. In a midlevel market of about 15 million vehicles, the automaker could generate as much as $13 billion in earnings before interest and taxes, Liddell said in a meeting with investors in New York on Nov. 8, according to the people, who asked not to be identified because the meeting was private.

The record for U.S. light-vehicle sales was 17.4 million in 2000. Sales last year fell to 10.4 million, according to researcher Autodata. Liddell didn't say when he expects to see auto sales climb to 15 million or higher. GM uses Lexington (Mass.)-based research firm IHS Automotive (IHS) for forecasting. IHS predicts that auto sales will reach 15 million vehicles in the U.S. in 2012 and 17 million in 2015.

In a video on the website, Liddell says that to break even, GM previously needed 25 percent of a U.S. market of 15.5 million vehicles a year. It can now be profitable with about an 18 percent share of a 10.5 million market. The new GM is "fundamentally different than the old GM," he says.

It's hard to argue with that. The company's U.S. labor costs are $5 billion, one-third what they were in 2005. Bankruptcy in June 2009 allowed it to close factories and shed weaker brands. The automaker, 61 percent-owned by the U.S. government, reported net income of $2.16 billion for the third quarter; it has made $4.8 billion this year.

GM has big hopes for the Chevrolet Cruze, a compact that went on sale in September and will soon come in a version that boasts highway fuel economy near 40 miles per gallon. In 2011 it will unveil a new Chevy Malibu, and a small Cadillac is due around 2013 to battle BMW's 3 Series. "I'll give it a hard look," says Brett D. Hoselton, senior auto analyst with KeyBanc Capital Markets (KEY) in Cleveland. "The question is whether they can execute the product portfolio strategy three to five years from now."

GM hopes to sell $10.6 billion in stock, representing 24 percent of the equity in the company, at $26 to $29 a share in the IPO. A $29 price would give the company a market value of $44 billion. Morningstar (MORN) analyst David Whiston estimates GM's stock would trade at 13.3 times this year's earnings per share, well above Ford Motor's (F) price-earnings ratio of 7.9. Whiston thinks the rich valuation is more than justified. "GM is going to print money once car sales come back," he says.

The bottom line: While GM has made progress since its bankruptcy, its success depends on a stronger economy leading to a big increase in car sales.

    Before it's here, it's on the Bloomberg Terminal.