After two months as a newly-public company, shares of GM (NYSE: GM) have posted a decent 10% gain, slightly better than the 6% gain posted by the S&P 500.

Then again, rival Ford Motor (NYSE: F) has risen by an even more impressive 14% since the day GM went public. So was the IPO a dud? Not according to Morgan Stanley’s analysts. They predict shares will rise from a recent $38 to $100 — a gain of more than 150%. That kind of price target seems awfully aggressive when most analysts expect shares to rise to $45 or $50. Let’s look at why Morgan Stanley is so impressed with the “new” GM…

Cash is king
According to Morgan Stanley, GM is on the cusp of printing money. They think the recent major cost cuts will set the stage for a steady surge in profitability as industry sales volume starts to perk up.

Right now, GM is valued at about $58 billion. Yet the automaker’s cash balance could exceed $70 billion by 2015, according to Morgan Stanley. (Cash currently stands at around $19 billion). Most of those gains will come in 2013, 2014 and 2015, when GM averages roughly $14 billion in annual free cash flow for each of those three years. Looked at another way, the projected 2013 free cash flow (FCF) yield on GM’s current market value is 24% ($14 billion divided by $58 billion). A 24% FCF yield ranks among the highest of all publicly-traded companies.

Rose-colored glasses
To be sure, Morgan Stanley’s analysts are far more bullish than any other industry watchers. For example, they think GM will earn $6.25 a share this year. Most analysts assume that per share profits will be around the $4 mark. And while most analysts see earnings per share (EPS) rising to $5 in 2012, Morgan Stanley thinks we’ll see $7 or $8 a share in profits next year. By 2015, they see EPS approaching $10, while most others don’t even look out that far.

Why the divergence in outlooks? Because Morgan Stanley predicts that GM will start to re-take lost market share in mature markets while also becoming a major player in emerging markets. The Morgan Stanley analysts have a point. GM has emerged as a powerful player in the fast-growing Chinese market, most notably with its Buick brand. And the company is working to extend that momentum into other Asian markets.

In decades past, U.S. automakers could barely make a dent in countries like Japan and Korea, thanks in part to restrictive import policies in those nations. Yet the real reason for tepid Asian sales may have been the fact that the GM tried to sell massive cars with thirsty engines in countries where the streets are narrower and taxes weigh heavy on cars with engines larger than two liters. These days, GM’s product line-up is far more compelling with an emphasis on fuel efficiency and comfort.
The speed bumps in the road

But Morgan Stanley could be wrong a pair of counts. First, competition has never been fiercer. Simply put, there is no such thing as a bad automaker these days. All of them sell attractive and reliable vehicles. Market share gains are no sure thing.

Secondly, Morgan Stanley forecasts a steady rebound in car and truck sales in coming years as the global economy rebounds. Indeed, they should rise somewhat higher this year, but continued gains in subsequent years may be hard to come by. Consumers are learning that there is no need to replace a car after it hits the 100,000 mile mark. And as cars last longer, total U.S. industry volumes are unlikely to ever re-visit the peaks of 2004 to 2007.

Morgan Stanley’s analysts are betting that emerging economies such as India, Vietnam, Turkey and elsewhere will help offset the down-sized Western automarkets. They may be right, but it’s too soon to tell.

Another more prosaic reason to be a bit cautious on Morgan Stanley’s very aggressive price target: That target implies an uninterrupted path of global economic growth for the next four years. And few want to make that bet. Goldman Sachs, for example, sees GM’s shares rising just up to the low $40s, simply because it is assessing the stock by expected financial performance in the next two years. Goldman Sachs notes that GM’s European operations, spearheaded by the Opel brand, have a major turnaround effort ahead of them.

 Action to Take –> We’ll get a pretty quick read on whether Morgan Stanley is on to a hot idea, or if the analysts are simply being naive. GM will release 2010 fourth quarter results in early February. Most analysts expect GM to earn around $0.50 a share. Morgan Stanley thinks EPS will come in at $0.91. If they’re right, then other analysts might begin to follow Morgan Stanley’s lead and talk of much higher price targets. Perhaps not the $100 that Morgan Stanley speaks of, but maybe in the $50, $60 or even $70-range.

This sets up an attractive risk/reward scenario worth watching (and possibly profiting from). If Morgan Stanley is wrong and GM earns around $0.50, then shares are likely to stay put. It seems quite unlikely that GM will miss that profit forecast, as we already know that recent sales trends have been pretty good. So downside from current levels looks limited. But if GM posts a strong quarter, then the Morgan Stanley analysis will be widely circulated and shares could quickly start to rise.

To get to Morgan Stanley’s price target — if it ever happens — will take several years. That’s because most auto industry analysts see the world in 90-day increments. That’s why they mostly missed the boat on Ford, slowly raising their price targets as its shares rose from $3 to $18 during the past two years. But just as Ford has emerged from the downturn in fighting shape, so has GM. Ford has been the darling play for many investors in recent years, but GM’s upcoming earnings release may change that dynamic.