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GM, in IPO Pitch, Says Profit Could Hit $19B in 'High Cycle'

November 5, 2010
3 min to read


DETROIT - General Motors Co., pitching investors on its initial public offering, said earnings before interest and taxes may rise to as much as $19 billion in what it called a “high cycle” for the global automobile industry, Bloomberg reported.


GM, planning to raise as much as $10.6 billion in an IPO, has reduced its hourly labor costs and will be able to produce as much as $16 billion in free cash flow with profit margins as wide as 10 percent, CFO Chris Liddell said.

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The old General Motors Corp. restructured in a U.S.-backed bankruptcy last year, allowing the Detroit-based automaker to earn as much as $4.2 billion through three quarters this year. The company aims to pay off all debts and fully fund employee pensions, Liddell said.


“This will give us the type of fortress balance sheet that we believe is appropriate for a company in a high fixed-cost, cyclical industry,” Liddell said in a videotaped presentation on the website retailroadshow.com.


GM estimates it will have slashed hourly labor costs by more than two-thirds by next year, to $5 billion from $16 billion in 2005. Health care-related costs alone for hourly retirees were $4 billion in 2005, Liddell said.


GM still needs to maintain its current cost base and see an economic rebound for those profit projections to come to fruition, said Mary Ann Keller, the consultant and founder of the self-titled firm in Stamford, Connecticut.


“The government set GM up to be very profitable,” Keller said. “But that assumes that the union doesn't get its concessions back and that car buyers keep buying trucks and SUVs at the level they are now. You need to know what the assumptions are behind those projections. No one should base their valuation of GM on it.”

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CEO Dan Akerson said the automaker now has “a bias for action” and is “making and implementing decisions faster than ever.” The company is looking to lower the stake the Treasury Department acquired as part of a $50 billion taxpayer bailout last year to 43 percent from 61 percent.


“We are making great strides in changing the GM culture to one that values speed, simplicity, accountability and action,” Akerson, 62, said in a presentation. The acquisition of General Motors Financial Co., the subprime lender formerly known as AmeriCredit Corp., shows the changing culture, he said.


In a so-called high cycle for global auto sales, GM could post margins as wide as 10 percent and generate free cash flow of as much as $16 billion, Liddell said. In a mid-cycle market, GM would have EBIT as high as $13 billion and free cash flow of as much as $10 billion, he said. Liddell didn't specify the level of vehicle sales that constitutes a mid or high cycle.


Third-quarter net income was $1.9 billion to $2.1 billion, GM said this week. GM said it will hold a conference call to discuss the results on Nov. 10.


GM plans to build on its position in emerging markets including Brazil, Russia, India and China, Akerson said. The former managing director of private equity firm The Carlyle Group became CEO Sept. 1, succeeding Chairman Ed Whitacre.

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Liddell said GM plans to command better pricing to increase profitability and cash flow. GM will use its stronger financial position to develop more models and grow in countries such as Brazil, Russia, India and China, where the company has the top combined market share, he said.


GM has 13 percent of the market in those countries, according to Liddell's presentation. Volkswagen has an 11 percent share, followed by Toyota Motor Corp. at 4 percent and Ford Motor Co. at 3 percent, the presentation showed. GM also holds the top spot in the North American market, which has the second-highest potential for growth, he said.


“We clearly have the best of both worlds,” Liddell said.

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