With significantly improved results in North America and a strong financial position, GM is likely ready to test the IPO waters.
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By Bill Buhr | 08-18-10 | 12:46 PM | Email Article

We expect General Motors to file its S-1 any day now, as the filing was briefly delayed by the announcement that CEO Ed Whitacre will be stepping down at the beginning of September. In the meantime, here is Morningstar analyst David Whiston's take on the company's strong second-quarter earnings, the management change, and some brief thoughts on the impending filing:

Bill Buhr is an IPO strategist and stock analyst with Morningstar.

"General Motors Company reported second quarter results Thursday that improved significantly from first quarter. Net income rose to $1.3 billion, or $2.55 per diluted share, from $865 million, or $1.66 per diluted share. Free cash flow was an impressive 8.5% of sales for the quarter and was 5.9% year-to-date.  Ford Automotive's  year-to-date free cash flow was only 1.6% of revenue per our calculation. GM did not release a cash flow statement so it is difficult to break out the major differences between GM and Ford's free cash flow gen eration. Capital expenditure as a percentage of sales is 3.3% for Ford versus only 2.9% for GM so this gap is part of GM's edge.

Compared to first quarter, GM also improved its key profitability metrics. Gross margin increased to 13.3% from 12.3% which shows the dramatic increase in retail pricing GM is getting thanks to better demand and new models that consumers are willing to pay-up to get. Car models saw a $2,100, or 9% per unit increase in U.S. retail pricing compared to 2Q 2009. The Buick LaCrosse played a significant role in this increase as its increase from last year was almost $8,000 per vehicle. Truck pricing was up $1,800, or 6%, and crossovers are up $3,000, or 11%. GM still cannot produce enough crossovers to meet demand but the upside to this scarcity is the firm has more pricing power which drives margin growth. Operating margin increased to 5.3% from 3.6%.

Although GM still trails Ford Automotive in profit margin metrics (operating margin YTD for Ford Auto was 6.3% versus 4.5% for GM), we do not think GM's improvements are finished. The firm is not done restructuring in Europe and will not see large benefits to its cost cutting moves until 2011. The segment is for now still losing money and will likely keep losing money as the expiration of many European scrappage programs will bring volumes down industry wide. Management also reported pricing pressure in China but GM International Operations (GMIO) still posted a 7.8% EBIT margin in 2Q, matching GM North America (GMNA). We expect earnings growth in GMNA next year as that segment should benefit from the eventual closing of the  AmeriCredit  acquisition drastically boosting leasing volume and below prime loans for Chevrolet customers.

GM's balance sheet remains very strong other than $26.4 billion in underfunded pension obligations. Cash, investments and restricted cash at June 30 was $32.9 billion, down from $36.7 billion at year-end. The firm has $5.5 billion in short-term debt and only $2.6 billion in long-term debt which is quite a contrast from Ford Automotive's total debt of $27.3 billion. Major media outlets reported late Wednesday that GM has secured a $5 billion revolving credit line with numerous banks but GM itself did not comment on this information.

Chairman and CEO Ed Whitacre spoke at the end of the call to announce that he is resigning his CEO post effective September 1st, and as Chairman by the end of the year. Dan Akerson, a current GM board member, will take over both positions. Akerson, 61, is also currently on the board of  American Express   and Head of Global Buyout at the Carlyle Group. His background is in the telecommunications industry, where he was chairman and CEO at XO Communications and what was then Nextel Communications. We do not think Whitacre would leave if GM is not ready to go public, as the new CEO needs to be in place to meet the investing community via road shows in the coming months.

This report is made available compliments of Morningstar IPO Research Services. For more information on Morningstar IPO Research, please contact Marc DeMoss at marc.demoss@morningstar.com or +1 312 384-4052.

 

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