Thursday, May 25, 2006

Merrill Lynch: Optimistic Outlook for GM

Shares of GM popped on Wednesday morning after brokerage giant Merrill Lynch issued a rosy report on GM's 2007 EPS picture, which Merrill believes will be positively impacted by the auto maker's gargantuan restructuring effort. Key takeaways/excerpts from the report:

1. "We are raising our rating to Buy...due to our expectation of a significant take rate on GM’s current buyout program...and establishing a price objective of $37, which is based on 9X our 2007 EPS estimate of $4.10...Based on comments by the UAW that as of May 3rd 12,400 GM workers had asked to take buyouts, our discussions with industry sources, and the assumption the take rate will accelerate into the June 23rd deadline, we estimate that there will be about 30,000 buyouts. This would represent a significant acceleration in GM’s current restructuring plan...."

2. "It should be noted that we are also adjusting for the portion of GMAC earnings that will be sold in late 2006/early 2007. As we outlined in our previous upgrade note, we thought there would be substantial savings from GM’s buyout program. However at that time, there was no clarity on the take rate, which is a key driver of incremental cost savings. Since then, the UAW has itself indicated that as of May 3rd, 12,400 GM workers had already asked to take the buyouts, which is an encouraging sign. In addition, through our discussions with numerous industry sources, we believe the number of takers will be materially higher when the progris scheduledled to end on June 23rd."

3. "We now estimate that GM will be successful in pulling forward its planned headcount reduction of 30,000 workers by the end of 2008 to present day, which would represent a significant acceleration of its restructuring plan announced in November 2005...."

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