Buy GM
By VITO RACANELLI
General Motors' turnaround could accelerate in coming years, driving handsome grains for bold stockholders. Needed: A jolt from the hybrid Chevrolet Volt.


IT'S NOT EASY BEING 100. JOINTS HURT, BONES ACHE and the funeral director's eyes brighten when he sees you. Just look at General Motors, which will hit the century mark in September.
Last week, it announced that it's downsizing its labor force by 19,000 workers. Many believe that even that won't be enough to keep the auto giant from the grave. In fact, GM (ticker: GM) now has a stock-market value of less than $10 billion, a mere 1/16th the size of Toyota's.

GM
Its shares, once a classic orphan-and-widow haven, have become favorites of short sellers aiming to profit as each spasm of bad economic news -- rising oil prices, higher unemployment, credit downgrades, depressed housing prices -- piles more downward pressure on the stock.

On the long side, General Motors now seems suited mainly for one group -- bold investors who hope to eventually double their money but can afford to lose it all if their wager goes awry. The good news for GM fans: Despite the misery that the car maker is experiencing and might endure for another 12 to 18 months, such a wager ultimately should pay off.

The litany of problems facing GM is daunting. Its SUV-heavy North American operation, its biggest unit, is bleeding red ink, as light trucks sink in popularity. And should the U.S. economic slowdown turn into a long, nasty recession, General Motors' $31 billion liquidity cushion could shrink dramatically before 2010, when the full impact of $4 billion-to-$5 billion in annual savings from a new United Auto Workers contract kicks in. And GM, which this year almost certainly will lose its mantle as the globe's No. 1 car maker to its Japanese arch rival Toyota (TM), continues to see its U.S. market share erode. At its annual meeting in Delaware this Tuesday, CEO Rick Wagoner is expected to disclose production cuts and other measures meant to conserve cash.

These worries, plus short-term issues such as the problems at GMAC Financial Services, GM's 49%-owned financing unit, have savaged the stock. At its recent price around 17, it had lost about 60% of its value since hitting 43 in October, when investors' hopes for a turnaround swelled.
BUT THE THICK GLOOM obscures improvements already evident and the prospect that GM's turnaround will accelerate over the next two to three years, even if the U.S. cyclical downturn dims the outlook for the next 12 months.

The shares could rise to at least 30 and maybe as much as 45 once those big cost reductions drop to the bottom line in 2010. And if the stars align perfectly -- the economy enjoys a second-half uptick and the housing market and consumer confidence turn for the better sooner than expected -- the stock's rebound could be quicker. Even a small improvement in sentiment could bring a disproportionate rise in the stock.
GM's junk-rated bonds, less risky than its equity, haven't slid as badly. Its short-duration notes due in 2011-13, for example, sell at about 85 to 93 cents on the dollar. Long-rated GM paper, like the senior note maturing July 15, 2041 (XGM), trades around 60 cents on the dollar, yielding about 12.35%. But, as with the stock, the Wall Street consensus view is mainly gloomy here, too.

Last fall's historic pact with the UAW deservedly made the headlines. Yet before that game-changing deal was announced, GM already had cut its global structural costs to less than 30% of revenue from 34% in 2005, although industrywide U.S. auto sales had dropped to an annual rate of 16.1 million from 2005's nearly 17 million. With the labor agreement, GM's target of trimming costs to 23% of revenue in 2012 looks achievable, despite higher material costs.

GM's problems stem almost entirely from North America, where its costs are still high and too many of its plants build gas-guzzling sport-utilities. But the labor deal essentially will level the playing field within 19 months. And GM is shifting its production mix toward smaller, more fuel-efficient cars while globalizing its stable of "platforms" -- the basic structures on which vehicles are built -- to increase its flexibility and react more quickly to changing consumer preferences.

OVERSEAS, WHERE MANY economies are still robust, the American car maker is faring well. In the first quarter, GM had an adjusted pretax loss of $611 million in North America, but pretax profits of about $1 billion in the rest of the world. Its sales are rising sharply in China, Russia and Latin America. Even a flat showing in North America would boost the stock. GM's first-quarter loss of $3.3 billion, or $5.74 a share, chiefly resulted from $2.9 billion in mostly non-cash special charges. Excluding them, its net deficit of 62 cents a share easily beat expectations by about $1.

Significantly, after losing a generation of consumers to better-engineered offerings from Asia and Europe, GM is designing quality cars again. Over the past 12 months, it's won a sackful of prestigious industry and media awards for vehicles like the hot-selling Chevrolet Malibu, which auto writers voted the 2008 North American Car of the Year, and the Cadillac CTS, Motor Trend's 2008 Car of the Year. Some GM marquees also did well on the latest J.D. Power ratings of dependability over three years, with Buick tying Lexus for first place, and next-best Cadillac coming in on their bumpers. Better cars can be sold with smaller incentives.
Another long-term plus is GM's growing embrace of green technology.

Nothing is more symbolic of this than the Chevrolet Volt, which GM is feverishly promoting (and lobbying for in Washington, to get a consumer tax break) -- two years before its scheduled debut.
CEO WAGONER HAS PLEDGED THAT the Volt, designed to challenge Toyota's primacy in hybrids, will debut in late 2010 and go at least 40 miles on a single charge without using its gasoline engine, which could make it an attractive commuter vehicle for many people.

GM also is introducing more non-plug-in hybrid cars and trucks. Some are "mild" versions that simply shut off the engine at stoplights and automatically restart it when the accelerator is pressed. Others are full-blown, advanced models, like the 2008 Chevrolet Tahoe and GMC Yukon, whose city mileage is 21 miles per gallon -- the same as a four-cylinder, manual-transmission Toyota Camry.
Table: GM's Woes

Developing such vehicles is costly, however, and some bears fear that GM's current problems could leave it without enough cash to survive until 2010. And there are lots of potential calls on GM's wallet.