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Ahead of the Bell: GM knocked from top picks list

November 10, 2011

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DETROIT—A Citi Investment Research analyst has removed General Motors Co.'s stock from his top picks list, but kept a "Buy" rating on the stock after the company cautioned that fourth-quarter earnings could be hit by macroeconomic problems in Europe and South America.

Analyst Itay Michaeli said in a note to investors Thursday that U.S. auto sales have stayed strong, GM has a strong market share and the company beat Wall Street estimates with its $1.7 billion third-quarter profit. "But unfortunately we've learned that the Q4 outlook has worsened even more than we thought on Europe/South America macro," Michaeli wrote.

Still, GM shares recovered a bit from an 11 percent fall on Wednesday. They were up 33 cents, or 1.5 percent, to $22.64 in premarket trading Thursday.

Michaeli wrote that a solid third quarter was spoiled by GM's guidance on fourth-quarter earnings before interest and taxes that was $700 million below his estimate. He said two-thirds of the miss was due to macroeconomic problems in Europe and South America, with the rest in North America, where costs could grow and the sales mix is changing to more compact cars from higher-priced vehicles.

GM said fourth-quarter adjusted EBIT would be about the same as a year ago, when it was just over $1 billion.

He wrote that GM's profits in North America were solid, despite investor worries about a price war. The company also hinted at better than expected investment performance from its pension plans, Michaeli wrote. That could free cash for "shareholder friendly cash deployment" next year, he wrote. GM has hinted that a stock buy-back program or restoration of a dividend are possible. The pension plans are valued at $9 billion less than their obligations, but the company said it has been taking steps to "de-risk" the investments and they have performed better than a typical pension plan.

A buy-back program could raise the stock price to the point where the U.S. government might sell its remaining 500 million shares in the company. In 2009, GM needed $49.5 billion in government loans to survive a trip through bankruptcy protection. The government needs $26.4 billion to recoup its full investment in the company. For that to happen, GM would have to sell its shares for about $53 each, more than double the current price.

Michaeli reiterated his "Buy" rating but lowered his one-year target price for the stock from $43 to $37.

"We remain buyers of the stock, but our inability to pinpoint another 1-2 month catalyst prompts the removal" from the top picks list, Michaeli wrote.

GM spokesman Jim Cain would not comment on Michaeli's note, but said the company has been clear about efforts to drive continuous improvement in all regions.