Is General Motors a Buy?

Last year General Motors Company filed for bankruptcy and collapsed into the government's arms. With around $170 billion in debt in 2009 and only $82 billion in assets, the bankruptcy filing kicked off a major restructuring effort.

On November 17^th this restructuring will culminate with an initial public offering (IPO).

At the time bankruptcy was announced, Chief Executive Frederick Henderson said the move would “...give us another chance”. President Barack Obama also supported the move, saying GM would emerge a “...stronger and more competitive company”.

Now, almost a year and a half later, General Motors appears to be getting its second chance.

***With GM getting back on track and the auto industry gaining momentum, the government appears to have enough confidence that the public will want to own shares again.

GM filed for the IPO back in August but did not release a specific share price at that time. Now it appears the company will raise as much as $10.6 billion by offering 365 million shares between $26 and $29 per share.

The IPO is expected to be one of the biggest offerings since Visa's (NYSE: V) $19.7 billion offering in early 2008. According to Bloomberg the U.S. Treasury currently owns around 60 percent of GM - after the IPO this stake should be closer to 43 percent.

***Now GM isn't going to IPO as a small cap stock with its projected market cap north of $40 billion, but we'll stretch the rules here a bit given the magnitude of this event.

The big question remains: Is GM a buy?

Taking a quick look at the prospectus it appears that in the first and second quarters of 2010, the company made $865 million and $1.33 billion, respectively.

Third-quarter results come out this Wednesday and the company expects to show net-income between $1.9 and $2.1 billion.

So profitability appears to be back. Regarding expansion plans, GM's CEO, Dan Akerson, said the company plans to continue strengthening its international presence in emerging markets like Brazil, Russia, India, and China where the company has the top combined market share.

GM is certainly competitive on a global scale with 13 percent market share in those BRIC countries, according to CFO Chris Liddell. This is pretty strong as compared to Volkswagen's 11 percent, Toyota Motor's TM 4 percent, and Ford Motor's (NYSE: F) 3 percent.

Liddell also commented that GM has the highest market share in the North American market - a market proclaimed to have the second-highest potential for growth.

***Naturally, with the company emerging from bankruptcy investors should be concerned about GM's profitability in the next few years. But I believe the restructuring has set GM up to be extremely profitable. After reducing hourly labor costs, Liddell says that GM will be able to generate as much as $16 billion in free cash flow, and profit margins as large as 10 percent.

Also, a huge element to the government's takeover of GM was a provision that allows the company to hold onto nearly $16 billion in operating loss credits. Over the coming years the GM will be allowed to use these prior losses to offset future tax bills.

Sounds like a pretty good deal right? Essentially the company lost money, then got bailed out and went through a restructuring, but keeps the 'benefits' of losing money in the past.

If you haven't realized the obvious yet, GM is one company that the U.S. government won't let fail. So if you want to invest with the full backing and support of the U.S. government - then you should definitely consider picking up shares of GM when they debut.

***Of course, some investors may be concerned that the company's reputation may hurt its prospects for growth. Has the company changed so much from the financially burdened company of years past?

GM believes it has. Liddell writes, “We are extremely pleased with the level of progress the company is making. We will deliver a solid and profitable first year post-bankruptcy, and we are continuing to improve our balance sheet and most importantly, the quality of our vehicles”.

The GM IPO will be one of the biggest in history and the company will debut with greater than a $40 billion market cap. Considering that Bloomberg reported that it entered bankruptcy when the market value was $13.5 billion, I'd say the company is headed in the right direction. The post IPO value will already be more than triple its pre-bankruptcy value!

What do you think? I'd love to hear your thoughts on GM and its upcoming IPO. Shoot me a message at: editorial@smallcapinvestor.com.