Auto Musing

General Motors has been front and center this week with the much-anticipated IPO being priced this evening. The company, during the last several weeks, has done a great job explaining the turnaround story on its road show and, as a result, demand has been huge (at one point it was 10- times oversubscribed) This means that institutions have put in orders that exceed the total shares are being offered by 10 fold.

As a result, both the offering size and share-price range have been increased meaningfully from the initial guidance. The number of shares being offered was increased by 31% (to 478 million shares) and the price range is now $32 to $33, up from $26 to $29. Total proceeds, including the overallotment and the preferred deal, could amount to as much as $22.7 billion, which would make this the largest IPO in history (surpassing Visa's (V) $19.7 billion deal in March 2008).

At the midpoint of the range, the stock will be priced at around a 10% discount to Ford (F) , an appropriate amount since Ford is much further along in its restructuring (having made significant product improvements, market share gains and drastically improved its balance sheet). That said, GM offers several potential positives -- a new business strategy, strong geographical mix and an improved cost structure -- if the company can execute on its plan. And at roughly 3.5 times to 4 times expected 2011 EV/EBITDA, the stock is attractive relative to the group (Ford trades at 4 time to 4.5 times).

GM has revamped the way it makes cars over the last few years (fewer product lines, higher quality, more content, better capacity utilization rates and lower inventories), and that has led to higher profitability per car and stronger market share. As it continues to do this, it will have stronger cash flow to re-invest back into its products for further improvements and further profits -- a positive, virtuous cycle. To this point, year to date, GM has generated $10.5 billion in cash flow.

The company's geographic mix is also very compelling. GM has the No. 1 market share in North America and the No. 1 market share in BRIC (Brazil, Russia, India, China) countries -- the two growth drivers in the auto segment. (In North America, cyclical demand is improving, China is the biggest auto market in the world and Brazil is the most efficient.) The company has less exposure in Europe (No. 6 market share), which remains a very challenging region.

Independent research expects unit growth potential of 13.9 million in China from 2010 to 2014, and GM's share has grown from 3% to 13% in that country over the last 10 years. Finally, the company has reduced its costs by 20% since 2007 (the main reason has been a reduction in labor costs from $16 billion to $5 billion) and improved efficiencies. As a result, it is able to be more profitable at a lower SAAR rate and lower market share. The company believes that, due to production efficiencies, it can break even at a 10.5 million unit SAAR vs. 15.5 million unit SAAR in 2007. With margins expected to grow from 6.6% this year to 13% in 2013, the leverage is significant, and -- combined with improving sales, estimates and valuation -- may actually be conservative as a result.

Not to be overlooked are the auto parts companies. The two with the most exposure to GM are American Axel (AXL) , with 78% exposure, and Lear (LEA) , with 15% exposure. I like the Lear story. The company came out of bankruptcy as a stronger entity with a better balance sheet, $1 billion in cash flow and strong products. If the stock were to pull back, I might consider buying.

I own Johnson Controls (JCI) which has 15% exposure to the "Big 3" U.S. original equipment manufacturers, mainly because it is the best in breed name in the sector with diversified customers, a strong balance sheet and leafing position in its three divisions: auto parts, batteries and HVAC (a late-cycle story that is not reflected in the valuation). In fact, Johnson Controls raised its dividend by 23% this morning -- a positive development.

When I am cleared to trade the group, and the GM stock settles down (there will be unusual trading activity due to institutional accounts flipping shares and the investment bankers/underwriters supporting the price) in a few weeks, I may consider buying, particularly under $35. I would also consider Lear in the low $80s. Or I may just add to a proven winner, Johnson Controls.

Regards,

Jim Cramer, Stephanie Link, and the Research Team

DISCLOSURE: At the time of publication, Cramer was long JCI.

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James J. Cramer is a Markets Commentator for TheStreet.com and CNBC, as well as Chairman of the Board and co-founder of TheStreet.com. TheStreet.com is a publisher.

Stephanie Link is the director of research & vice president of strategy for TheStreet.com. She is the co-portfolio manager for Action Alerts PLUS and works daily on the strategy and stock picks chosen for the portfolio. Stephanie is also responsible for recruiting talent for the paid sites including options, technicians and fundamental contributors. Prior to joining TheStreet.com, Link worked on Wall Street for 16 years. She spent nine years at the Prudential Equity Group as a managing director in U.S. institutional sales and as the New York sales manager covering top national accounts. She was the managing director of equity research in her final year at the firm. Prior to that position, she worked at Dean Witter as an institutional sales person for six years. Link's investment specialties include large-cap core stocks as well as value ideas.