Gamble of the week: US carmaker
By
Tim Price Nov 07, 2007
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Buying into any US carmaker requires an iron constitution, not least when the US consumer is beset by falling property prices, higher mortgage refixes and an oil price that seems to be powering inexorably toward $100 a barrel. The rapidly rising cost of raw materials won’t be helping. But this stock looks attractive nonetheless:
General Motors (US:GM), raised from SELL to BUY at UBS
Brokerage UBS reckons that recent labour agreements at what is still the world’s top carmaker by sales will boost profitability and pave the way for a “transformational” change at the US auto giant. The group has doubled its 12-month price target for General Motors from $24 per share to $48.
Any positive outlook for GM hinges on the deal agreed between the company and the United Auto Workers union at the end of September, which restructures GM’s obligations to cover health care costs for UAW pensioners. It also allows GM to buy out workers costing around $70 an hour and replace them with new employees earning significantly less. In return, GM will invest in UAW-represented factories and make some improvements to pension benefits.
The cost to GM of worker healthcare provision is $51bn in liabilities. So yes, the deal may well be genuinely transformational for the company’s fortunes. Now the company needs to get back to the basics of designing and selling cars that Americans (and others) want to buy, that help the company claw back some of the market share lost to Toyota and other foreign competitors. No easy task, but the market is currently giving GM the benefit of the doubt: since the start of 2006, the stock is up by more than 88%.
Recommendation: a contrarian BUY at $38.62
Tim Price is CIO of Global Strategies at Union Bancaire Privée, London. Tim also runs his own share-tipping service, The Price Report.
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