World's largest auto maker General Motors Co. (GM) shares rallied 9 percent on February 16, after the company announced its fourth quarter as well as full year results. The rally came despite losses from the European units and South America. Though the company indicated restructuring for the Euro Zone, it refrained to announce the methodology or the time limit needed to achieve the restructuring.
General Motors reported adjusted EPS of 39 cents a share compared to analysts' projection of 41 cents a share, which means 5 percent miss. However, it came in above Jefferies estimate of 36 cents a share.
Jefferies, in a note to clients, attributed four factors for the company's shares to turn back the tides from the pre-market trading activities, where it witnessed losses. GM's pension plan came in better than expected that gave a returns of 11.1 percent to strong assets in 2011; significant contributions from North American units of 60 percent even after some mixed headwinds; improved jobs data besides the leaking of probable European loss estimate to a journal before the results.
The 9% upside in GM shares clearly underscored how much the expectations have come down over the last year. The rally can be attributed to the market rally after January 1, coupled with improved job market data and housing scenario. While these cannot essentially be good reasons to apply reverse gear and buy the stock, Jefferies believes that the path of least resistance has increased from here.
The previous experience indicates that low-quality rallies can last longer than predicted especially when most of the managers are behind their benchmarks, which, in this case seems to be this year.
Considering all aspects, Jefferies expects investors could warm up to the stock upon a pull back, though the brokerage thinks that it would probably be mostly a beta trade at this point. The brokerage reiterated Hold rating on the company shares.
Analyst Peter Nesvold has a price target of $31 for the shares of GM based on estimated EBITDA valuation of $15.043 billion for 2013, which is a mid-point of Western Auto OEM valuation.
For the target investment thesis, Jefferies expects moderate economic growth in US and EU, but China should grow around 7-8 percent, gradual recovery of auto demand, uptick in commodities trend but contained inflation and incremental margins that face headwinds from increased input costs, tougher mix comps besides catch-up launch costs.
For the upside rewards, economic recovery, auto sales in the Europe and the U.S., rising volume and steady commodity prices driving strong incremental margins besides multiple contracts on peak earnings are listed as possible catalysts.
Sovereign debt crisis situation, fading demand, competitive pricing besides material inflation are some of the issues listed for downside risks.