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Despite IPO, GM is still a gamble for investors

After a little more than a year as a government-owned company, General Motors is about to go public again.
/ Source: Forbes

After a little more than a year as a government-owned company, General Motors is about to go public again.

In a bit of twisted irony, the public will soon be offered the opportunity to buy shares in a company they already own. The difference is that this time, they have a choice. When the Obama administration threw bankrupt GM a $50 billion lifeline last year, taxpayers ended up with a 61 percent stake in the company but didn't really get a say in the matter.

Now, the people who believe a reinvented GM is going to be hauling in huge profits are invited to place their bets. The rest of the public can stop complaining. Well, maybe not yet. The U.S. Treasury is putting only about 20 percent of its stake in GM up for sale for now, meaning taxpayers will continue to own a substantial piece of GM for the foreseeable future.

Still, it's worth asking: Is the new GM a good investment?

On the plus side, the revamped automaker has already proven it's capable of earning a tidy profit, even in a miserable economy. In the first half of 2010 GM earned $3.8 billion before interest and taxes (EBIT), even though vehicle sales are running about 25 percent below recent historical trends. And it generated $3.8 billion in cash during the first half, instead of burning it at the rate of $1 billion per month as it had been before bankruptcy. Imagine what it might do when times are good.

After dumping Pontiac, Saturn, Saab and Hummer, GM's U.S. market share appears to be stabilizing around 19 percent, a healthy level. And it's got some genuine hits in its lineup, including the Chevrolet Equinox and Cadillac SRX crossovers. Overseas, where more than half of its sales occur, GM is well positioned, especially in China, now the world's largest market. It's using China as a launching pad for India and other emerging markets. So there's plenty of international growth ahead.

Oh, but there are plenty of risks, all of which are spelled out in a Securities & Exchange Commission filing. Here's a rundown of the biggest:

Changing eadership
Very little is known about the company's new chief executive, Daniel Akerson, who takes over on Sept. 1 from outgoing chief Edward Whitacre Jr. It's hard to weigh the company's chances for success when the guy in the corner office keeps changing. (Akerson is the fourth CEO in 16 months)

Uncompetitive pay
Until GM is no longer supported by the government, management salaries are capped under TARP rules. With fewer managers on the job, people are doing more work for less pay than they could earn elsewhere.

Weak sales volumes
Though recovered slightly from 2009, the vehicle market's a long way off its recent trends. As long as unemployment remains high and housing prices low, car sales will stay in the doldrums.

Tough competition
GM's cars are better, but so are its rivals'. And in an industry with so much excess capacity, there's always the danger that GM will become engaged in a price war.

Raw materials
Prices for metals like steel, aluminum, copper, palladium and platinum have risen substantially, and can't always be passed on to the consumer. Even the cost of freight is higher.

Fragile supply chain
The economy's been tough on auto suppliers, too, and those who didn't file for bankruptcy or go out of business in 2009 have had difficulty obtaining credit to fund their businesses.

Still too many dealers
The process of weeding out unprofitable dealers is taking longer than expected, after Congress intervened and called for arbitration hearings. GM, which had more than 6,000 dealers before bankruptcy, has 5,200 now and expects to trim that to 4,500 by the end of the year, but there's no guarantee it'll win every arbitration case. Meanwhile, legal costs keep rising.

Bankruptcy wiped away much of GM's debt, but it still has a looming problem on its balance sheet: $26 billion in unfunded pension liabilities. GM warns that it might have to make substantial contributions to its pension funds in 2014 and beyond.

Access to credit is still tight
GM used to rely on GMAC (now Ally Financial) to help dealers finance their wholesale inventory and consumers get car loans. But it sold GMAC before bankruptcy and now is trying to rebuild a captive finance arm beginning with its purchase of subprime lender AmeriCredit. That's a work in progress.

Labor issues
The labor picture is much improved for GM, which used the pressure of bankruptcy to renegotiate competitive labor agreements. The current labor deal expires in 2011. And the UAW agreed not to strike before 2015. But new UAW President Bob King makes clear he wants workers to share in GM's recent good fortune. If labor costs start rising again, GM could be back where it started.

Health care obligations
GM managed to offload its responsibility for retiree health care to a union trust fund, but it still owes money to the fund: 9 percent quarterly dividends on 260 million preferred shares held by the fund, and installment payments of $1.4 billion each in 2013, 2015 and 2017.

Regulatory issues
The government continues to ratchet up demands for safety and fuel efficiency technologies. But these can add hundreds of dollars to a car's price.

Europe is still a mess
After failing to obtain help from European governments, GM has to restructure its Opel/Vauxhaull operations on its own, which will require substantial costs. If it can't, bankruptcy is possible, the company warned.

China is not as profitable as it could be
Squeezed for cash in its important Korean operation, GM last year sold controlling interest in its most promising China joint venture to its Chinese partner. Not only does GM get a smaller share of the profits in China, decision-making is now in the hands of its partner.