Just to reiterate, Cramer is bullish not just on this IPO, which he called perfectly timed given the stark contracts between GM’s bailout past and its now seemingly bright future, but the company as well.
GM boasts a strong emerging-markets business in the BRICs, with a 13-percent market share in China, up from 3 percent 10 years ago. There’s 13.9 million new cars’ worth of growth potential in the Middle Kingdom alone between 2010 and 2014.
Plus, GM cleaned up its balance sheet while whittling down its product lines to focus on four core brands—Buick, Cadillac, Chevrolet and GMC. At the same time, a combination of cost cutting and lower inventories have translated into better capacity utilization rates. That, coupled with new, higher-quality cars, means more profitability per vehicle and a healthier market share. And cost cuts also mean GM is better able to weather the low points in the business cycle while making more money at the high points.
“GM’s still in the early innings of this turnaround,” Cramer said. “As the company continues to improve, it will have more cash flow, which it can then re-invest back into the products, making them even better, and that leads to still greater profits.”
Cramer also praised GM’s “enormous” operating leverage. Basically this means that the company’s margins get bigger and bigger as it sells more and more cars. Each additional sale is more profitable than the last. So as US auto sales rev up, Cramer said, “GM’s earning will really be able to soar.” Hence the projections for margins to reach 13 percent in 2013 from 6.6 percent this year.
Given the 2011 earnings estimates for General Motors, Cramer thinks the stock could reach $40. Based on the 2012 numbers, though—“where this story really gets good,” he said—his price target goes even higher: to the mid to high $40s. Plus, GM most likely will be added at some point to broader market indices like the S&P 500, which would spur further buying and take up the share price even more.
One last note of caution: Even if GM does climb to the $40s as Cramer predicted, potentials pullbacks to the $30s are always going to be an issue.
“So you’re giong to have to be really patient,” Cramer said, “to get that higher price.”
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