GM Shares Jump on Analyst Upgrade
Shares of General Motors jumped in early trading Thursday, after a Citi Investment Research analyst lifted his rating on the automaker, citing possible outcomes from labor negotiations.
GM shares rose $1.77, or 5.85 percent, to $32.02.
Itay Michaeli, in a client note assuming coverage of the stock from another analyst, lifted his rating all the way to "Buy" from "Sell" and bumped his target price to $41 from $27.
Nevertheless, Michaeli said GM is currently not a buy-and-hold stock, since the company's long-term turnaround is "heavily tied to the outcome of this fall's labor negotiation."
"We deem any investment that relies on the success of union negotiations to be speculative in nature," he added.
The analyst said two possible outcomes from labor negotiations result in target prices for the stock of $57 and $26, and got his new target price by averaging these together. The simulated outcomes focus on discussions with the United Auto Workers union, for a contract that will cover the 2007-to-2011 period.
Michaeli said the most likely outcome of contract negotiations is the formation of a voluntary employees' beneficiary association (VEBA) trust, which would fund GM's high retiree healthcare (OPEB) obligations.
In recent years, the company, along with other domestic U.S. automakers, have said employee benefits are costing them too much, allowing Asian manufacturers with lower-cost structures to continue to eat into domestic market shares.
Shares of GM rival Ford Motor also spiked Thursday , rising as high as $7.89 a share.
"Shifting GM's OPEB liabilities into a VEBA trust would, by our calculations, restore positive automotive free cash flow, and provide GM with additional breathing room to continue addressing long-standing domestic issues such as market share losses," the analyst wrote.
The trust would allow GM to make after-tax contributions to pre-fund health benefits for its employees. Such a scenario could generate a share price of $57.
In another scenario, the analyst noted it is possible that GM will not get any concessions from the labor group, which could result in shares moving toward $26.