The Bear Case on GM

Yesterday we posted the bull case on General Motors' (NYSE: GM) historic IPO. Today we will look at the bear case.

Earlier in the month, UBS initiated coverage on the new GM with a Neutral rating and $37 price target. The rating was notable because UBS was not involved in the underwriting, unlike nearly every other firm that launched bullish coverage on the stock earlier this week.

UBS's view is not entirely bearish, but it is defiantly the least bullish of the tier-one i-banks and its viewpoints should be known by bulls and bears alike.

UBS entitled its report: "Why buy now? No near-term catalysts…"

The firm said the combination of: 1) cautious Q4 guidance; 2) a weak North American product launch schedule; 3) full-pension re-measurement at year end; 4) aggressive breakeven targets in Europe; and 5) slowing growth in China cause them to believe GM lacks near-term catalysts required to move the stock.

The Neutral rating from UBS is mostly based on the fact that the firm cannot articulate a great reason to buy right now.

Importantly, UBS noted that the 2010 consensus DOES NOT properly reflecting GM's Q4 guidance that Q4 EBIT would be significantly lower than the first three quarters. The firm sees 2010 EPS of $2.70, which is well below the consensus of $3.21. The firm sees Q4 EPS estimates of $0.26, versus the consensus of $0.53.

So, what UBS is saying is that GM will miss in earnings in their first report as a newly public company.

The biggest near-term risk for GM, in the firm's opinion, is that demand for upcoming product launches is weaker than expected, which could cause GM to relatively underperform on a share basis despite the SAAR recovery. The firm also views the new, and still unproven, management team as a risk given their limited track record and lack of prior industry experience. Another risk is that consumer demand shifts back towards cars versus trucks faster than GM can launch new product offerings in the subcompact and small car segments, which would create additional market share pressure and margin compression.

The firm gets to its $37 price target based on a sum of the parts valuation that attributes: $22 to core auto operations, $6 to Chinese JVs, $5 to the present value of the NOLs; $3 to Delphi; and $1 to the remaining Ally ownership.

The firm places a 4x EV/EBITDAP multiple on GM's core auto operations (5.5x traditional 2011 EV/EBITDA), which is a slight discount to our Ford multiple at 5x.

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