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GM Redemption Seen Culminating in Return to S&P 500 Index

May 01, 2013

GM Redemption Seen Culminating in Return to S&P 500 Index

GM, based in Detroit, will probably report its 13th straight quarter of profit May 2 when it announces results for the first three months of the year, according to a survey of 16. Photographer: Daniel Acker/Bloomberg

As the U.S. Treasury sells off its shares of General Motors Co. (GM:US), the automaker is likely to return to the Standard & Poor’s 500 Index in the next year, passing another milestone in its redemption.

“GM is a pretty highly eligible candidate for an addition to the S&P 500 because it’s got a lot of things going in its favor,” said Bo Huang, an equity-index strategist at Deutsche Bank AG in New York. He cited GM’s string of profitable quarters, its market capitalization of more than $40 billion and its increasing percentage of shares available to the public.

Whenever this happens, it will be more than just an honor: Getting back into the S&P 500 would help U.S. taxpayers expedite their exit from the company, likely boost GM stock in the short term and help support the shares in the long run as well.

GM, based in Detroit, will probably report its 13th straight quarter of profit May 2 when it announces results for the first three months of the year, according to a survey of 16 analysts by Bloomberg. Revenue likely slipped 3 percent as the automaker geared up to introduce about 20 new vehicles in the U.S. this year, including a redesigned Chevrolet Silverado pickup and Impala sedan this quarter.

The automaker has said it expects modest improvement this year compared with 2012, when it earned $6.19 billion (GM:US), the third profitable year since emerging from a $49.5 billion U.S. government bailout and bankruptcy reorganization in 2009. GM returned to the stock market in November 2010 with an initial public offering that raised $15.8 billion, before expanding to $18.1 billion when underwriters exercised the over-allotment option.

‘Moment of Pride’

“Becoming once again part of the S&P 500 (SPX) is a big deal” and will be a “moment of pride of being allowed back into the club,” Joseph Phillippi, principal of consulting firm AutoTrends Inc. in Andover, New Jersey, said in a telephone interview.

A minimum free float -- the percentage of shares available to the public -- of 50 percent is required for companies to be considered for addition to the S&P 500, according to criteria published on the website of S&P Dow Jones Indices, a joint venture of McGraw-Hill Cos. and CME Group Inc. A candidate also needs a market value of more than $4 billion, four consecutive quarters of profits and at least six months of trading following an initial public offering. Index changes will be made “as needed,” S&P said.

Racing Facebook

Another possible candidate to be added to the index is Menlo Park, California-based Facebook Inc. (FB:US), which held its IPO in May of last year.

“For GM and Facebook, there’s plenty of trading volume and the market cap is appropriate,” Giri Cherukuri, head trader and portfolio manager, who helps manage $3 billion at Oakbrook Investments LLC in Lisle, Illinois, said by telephone. “It’s just a matter of float for GM and a matter of sufficient trading history for Facebook.”

GM, which held its IPO in November 2010, has a market capitalization of more than $42.1 billion. Facebook’s is $67.1 billion.

GM has been profitable every quarter since the IPO. Its free float increased to at least 51.5 percent this year from 44.5 percent at the beginning of 2012, data compiled Bloomberg show. Facebook, on the other hand, lost money (FB:US) in the second and third quarters of last year.

GM rose 0.2 percent yesterday to $30.84, the highest (GM:US) closing price since July 2011. While the shares remain below the $33 IPO price, they increased 7 percent this year through yesterday on top of a 42 percent gain in 2012.

Dropped in 2009

On the eve of its June 1, 2009, bankruptcy, GM was dropped from the S&P 500 for the first time since the index was established 57 years ago. It may return as early as this quarter, Huang said by phone on April 17. GM’s predecessor, General Motors Corp., was dropped from the Dow Jones Industrial Average at that time.

GM’s return to the S&P 500 would likely boost its share price.

“It could help the share price because index funds will have to sell something and buy GM,” Phillippi said.

Managers with funds linked to the index would need to buy about 80 million GM shares, representing an opportunity for the U.S. to expedite its sale of the automaker’s stock, Huang said. About 9.7 million GM shares have changed hands each day during the past year on average, data compiled by Bloomberg show.

‘Very Convenient’

“It would be a very convenient liquidity event for the Treasury to bring a lot of shares on the market and for that to get absorbed efficiently,” Huang said.

The Treasury said in December that it plans to sell its entire GM holding within 15 months after the automaker bought $5.5 billion of its stock, or 200 million shares, from the government. As of April 1, the Treasury held 241.6 million GM shares, representing a 16.4 percent stake, according to GM’s proxy statement (GM:US).

There is a greater than 50 percent chance that the S&P 500 will include GM over the next 12 months because the automaker meets all the criteria and the industry’s representation is small, according to John Goltermann, who helps oversee $850 million at Obermeyer Asset Management Inc. in Aspen, Colorado.

Auto and auto-parts manufacturers make up 0.8 percent of the index, the second-smallest weighting among 24 groups, data compiled by Bloomberg show.

“Being in the benchmark, you get a solid core of index investors,” Oakbrook’s Cherukuri said. “Index investors will buy the stock because it’s in the index and they’ll be long-term holders. Companies generally like to have long-term shareholders and a stable shareholder base.”

Detroit’s Comeback

GM’s resurgence since bankruptcy comes as competitors Ford Motor Co. (F:US) and Chrysler Group LLC see improved sales from some of their best offerings in a generation.

Chief Executive Officer Dan Akerson told reporters in January that this year and 2014 will be “good years” as GM introduces new products.

GM has said the benefits of its new products won’t start to show up until the second half of the year in North America. The first quarter, in particular, was a transition time for GM as it prepares its North America truck plants for redesigned pickups that reach U.S. showrooms this year.

The automaker’s U.S. sales rose 9.3 percent in the first quarter, exceeding the industry’s gain of 6.4 percent, as it sold off the old pickup, according to researcher Autodata Corp. Deliveries of the Silverado and Sierra combined increased 21 percent during the quarter.

Incentives Rising

The average incentives on the trucks rose 33 percent to $5,894 per vehicle, according to Edmunds. That compares with average incentive spending by GM of $3,625 per vehicle, a 12 percent gain, and $2,373 per vehicle for the industry, a 10 percent increase.

“While incentive spending has gone up, particularly on their large trucks, those rises reflect the wind-down of current model-year Silverado and Sierra,” Jeremy Acevedo, an Edmunds analyst, said in an e-mailed statement. “This spending should contract when the restyled large trucks hit showroom floors in the coming months.”

That may have pinched GM’s first-quarter earnings. Diluted earnings per share probably slipped to 54 cents, the average of 16 analyst estimates (GM:US), from 93 cents a year earlier.

Outside the U.S., GM continued to see growth in China, where it is the best-selling foreign automaker. Sales through GM’s joint ventures increased 9.6 percent in the first quarter in China.

Sales Race

Worldwide sales rose 3.6 percent during the first quarter to 2.36 million, not enough to beat Toyota Motor Corp. (7203), which retook the title of best-selling automaker in 2012.

Toyota has said it expects to sell 10 million vehicles this year. Its sales slipped 2.2 percent to 2.43 million during the first three months of 2013 while its net income may have increased 75 percent to $2.67 billion, the average of six estimates, compared with the same period a year earlier.

Volkswagen AG (VOW), which aims to outsell both GM and Toyota by 2018, sold 2.27 million in the quarter, a 5.1 percent gain.

Acquisitions of S&P 500 companies, such as Coventry Health Care Inc.’s purchase by Aetna Inc. and Plains Exploration & Production Co.’s takeover by Freeport-McMoRan Copper & Gold Inc., will open the door for GM to enter the index, according to Deutsche Bank’s Huang. GM shares have already been added (GM:US) to the Russell 1000 Index and the MSCI World Index, data compiled by Bloomberg show.

Two stocks in the S&P 500 have a smaller free float than GM: Diamond Offshore Drilling Inc. at 49.6 percent and Wal-Mart Stores Inc. at 50.2 percent, data compiled by Bloomberg show.

‘Soon as Possible’

With its market capitalization, GM would rank ahead of home improvement retailer Lowe’s Cos., the 93rd-biggest stock in the S&P 500, data compiled by Bloomberg show.

Dave Guarino, a spokesman for S&P Dow Jones Indices, declined to comment on potential changes.

“We’d hope to have that happen as soon as possible,” Dan Ammann, GM chief financial officer, said during a taping of “Autoline This Week,” which will be broadcast beginning May 17 on PBS stations or at www.autoline.tv. “But that’s completely out of our hands.”

To contact the reporters on this story: Tim Higgins in Southfield, Michigan, at thiggins21@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net; Lynn Thomasson at lthomasson@bloomberg.net


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