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Thursday, July 27, 2006

GM’s Stock Could Rise 75%, Again

Stocks: (GM) (DCX)

The stock in General Motors has risen 75% from its 52-week low of $18.33 to the current $32. A lot of Wall St. investors would suggest that anyone who thinks it will rise that much again this year should be put on anti-psychotic drugs. Maybe not.

GM’s revenue rose from $48.5 million in the quarter a year ago to $54.4 billion in the current quarter. Without one-times items factored in, the company made $1.2 billion. Cash on the balance sheet went up $500 million. The company made two other important announcements. One was that it would up its annual savings target by $1 billion to $9 billion per annum. The other was that the company’s new line of pick-ups and SUVs is doing well. Counterintuitive, given gas prices.

Now that the General has effectively thrown out Carlos Ghosn with good numbers and muscle-man statements about the pace of its turnaround, the question becomes how high is up?

GM’s stock trades at 10% of revenue. DaimlerChrysler trades at 25% of revenue. GM is not near where Daimler is from a balance sheet or earnings level, yet.

In January 2004, GM’s stock changed hands at $55, which is roughly 71% above the stock’s current price. The year 2003 had not been a bad one for GM. Revenue was $185.5 billion. Earnings before taxes were almost $3 billion, and, after taxes, $2.3 billion.

Take the quarter just reported, less one-time events, and annualize it. Revenue would be $216 billion. Income would be $4.8 billion.

If GM commanded DaimlerChrysler’s revenue-to-price ratio, the General’s stock would trade at $80. Not likely. But, if the company gets back to an annual income run rate of $4 billion, the idea of the stock hitting $55 is entirely possible. With annual cost saving of $9 billion a year, and a small tail wind in sales, GM may just get there.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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