Buying After the Bailout: General Motors
After adding an economic crisis to a financially unhealthy automaker, General Motors looked ready for collapse near the beginning of 2009. In response to the potential damage GM's collapse would have on the fragile American economy, the government sought to reorganize GM through the bankruptcy process. Today, a new GM is trading -- one with less debt, a better cost structure, and more right-sized operations. And with the government winding down its GM stake, it looks like an ideal time to examine this reorganized auto giant.
Once the majority owner of GM, the U.S. government has now reduced its stake to 7.3%. With the government expected to finish selling its common stock stake by early 2014, GM looks closer to being free of government ownership than ever.
And with the elimination of the government stake, additional market factors begin to come into play. Investors hesitant to buy shares of partially government-owned companies may take another look at GM possibly increasing buying pressure. But GM shares should also benefit from there no longer being a steady large seller flooding the market with stock. Once the government is finished selling, if demand for shares remains the same, then GM stock should begin to rise as buying pressure begins to overwhelm selling pressure.
Even though economic conditions are still not great, the economy is growing slowly and is much better than it was in the dark days when GM was being bailed out. GM has two major ways to benefit from a growing economy -- one from everyday people, and one from businesses.
Starting with the everyday consumer, these buyers still need to replace older cars held on to through the recession. This, combined with the normal flow of orders from people replacing vehicles at a regular pace, should drive GM's sales higher on the everyday consumer side.
But businesses also represent a major driving force for GM. Among the automaker's most profitable vehicles are pickup trucks that are used for various work purposes. With the construction industry on the rebound, demand for these trucks should grow as businesses need to expand their fleets or replace older vehicles.
Thanks to the bailout and subsequent reorganization, GM now has ways for investors to gain long-term leverage on a rising share price. Issued to creditors as partial payment for their claims, GM Class A warrants and GM Class B warrants expire in 2016 and 2019, respectively. With strike prices of $10 for the Class A warrant and $18.33 for the Class B warrant, both are well in the money. In addition, the market isn't adding a significant time premium to either warrant, giving investors added leverage for little additional cost.
For the very bullish GM investor, GM Class C warrants also trade with a strike price of $42.31 and an expiration date of Dec. 31, 2015. These warrants can provide around nine times leverage on GM shares but are currently out of the money. In many ways, they act as a LEAP on GM shares and represent a much more bullish bet on GM.
The collapse of General Motors and its subsequent government-funded reorganization has wiped out the old GM shareholders and led to the derisive nickname of Government Motors. But the government stake in GM has been reduced to less than 10% and is expected to be eliminated either late this year or early next year. As more buyers return to the market, selling pressure decreases, and the economy continues to grow demand for GM vehicles, the automaker should have some major tailwinds working for it. Investors bullish on the automotive industry may be wise to take another look at General Motors.
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The article Buying After the Bailout: General Motors originally appeared on Fool.com.Alexander MacLennan has no position in any stocks mentioned. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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