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GM's Shares Could Pay Off When Its Cost Load Lightens

There's huge risk but potentially huge reward in beleaguered General Motors.

GM celebrates the 100th anniversary of its founding in September, but the party could be grim. The Detroit behemoth, which this year probably will lose its title of world's largest auto maker to Japan's Toyota Motor, is facing one of the most difficult periods in its history.

GM's SUV-heavy North American operation, its biggest unit, is bleeding red ink, as light trucks sink in popularity. And should the U.S. economic slowdown turn into a long recession, General Motors' $31 billion liquidity cushion could shrink dramatically before 2010, when the full impact of $4 billion to $5 billion in annual savings from a new labor contract kicks in.

Factory Closings
At the company's annual meeting Tuesday, Chief Executive Officer Rick Wagoner disclosed production shifts, factory closings and other measures meant to conserve cash and cope with the changed automotive environment.

Throw in other worries, such as the problems at GMAC Financial Services, GM's 49%-owned financing unit, and it's easy to see why GM stock recently was around $16 -- more than 60% below the $43 it fetched in October.

But the gloom obscures improvements already made and GM's solid turnaround plan. The shares could rise to at least $30 and maybe as much as $45 once those big cost reductions drop to the bottom line in 2010. GM is accelerating its shift toward production of smaller, more fuel-efficient vehicles.
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