What Makes This Auto Stock Better Even Amidst Economic Headwinds

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Europe’s struggling auto industry poses as a huge threat to major global automakers as it makes it impossible for the automakers turn a profit in the region. Almost every player in the area has to offer substantial discounts simply to get the cars off the lot and now industry experts and analysts are expecting the sales in the region to drop to a 17 year low in 2012. In the region, the best economic condition is being experience by Germany, where the current discount being offered is over 12% below the retail price for vehicles. Many automakers are cutting jobs and closing down plants. Peugeot, who had to offer discounts up to 30%, expects the European car market to contract by 8% by 2013 and any improvement in the region isn't expected until 2014.

Since 1999, General Motors (NYSE: GM) has lost $16.8 billion in the European market, out of which $617 million was lost in the first half of 2012. However, the present quarter will probably be a little different for the car maker as it witnesses recovery across the majority of its portfolio. Apart from the headwinds in Europe, GM is also facing issues related to recall of many older models and pending litigation. Amidst all these, the release from GM about improved sales numbers in August was a breath of fresh air for investors.

GM recently reported sales of 240,520 vehicles in August, a 10% increase over the prior year period. Year on year, GM's retail sales increased 11% and fleet sales increased 6%. GM partially credits advertising during the Olympic Games, displaying confidence and transforming the product line up for the surge in sales. The company is also busy in redesigning around 70% of its cars in 2012 through 2013 and the new 2013 Malibu and Cadillac ATS are currently launching in dealerships.

The favorable Chinese market
Though GM has been facing setbacks in the European market, the Chinese market is benefiting the company hugely. The recent surge in anti-Japan protest in China came as good news for the American and European car makers, giving these players a genuine chance to experience an increase in their Chinese sales as the Japanese car makers are expected to see deep cuts in their sales numbers.

In the protest, Toyota Motors (NYSE: TM), Honda Motors (NYSE: HMC) and Nissan, the three biggest auto manufacturers, have experienced a severe shortfall in demand and there are high chances that they will face more declines in the coming days. It is even being said that, for the Japanese automakers, the protest will turn out to be more harmful than last year’s tsunami.

While Toyota and Honda Motors are trying to cope with the situation, GM is having a great time in China. Very recently, on September 21, GM sold its two millionth car in China for 2012, making 2012 the third stratight year in which GM has sold 2 million cars in China. Again, this was the earliest date when GM has ever reached the 2 million sales levels in China and what makes it even important is this took place in a year in which car sales in China are dropping. GM and Volkswagen are both benefiting from the situation. And now, even Ford has also joined the league by posting strong sales in China during the month of August, with 39% growth over the prior year period.

China is the world’s largest auto market with 18.5 million sales last year and analysts are expecting sales of 20 million by the end of 2012. GM is making money by selling cars in China as understood from the 10.8% top line growth and 62.5% bottom line growth which the company displayed in the last year. This means, the company can use profits from the Chinese markets to off-set the impact of the losses it is incurring in the European markets.

GM against competition
In terms of valuation also GM is looking better than its peers. GM’s P/E of 8.3 is lower than that of Toyota and Honda. Again, GM's P/B ratio and P/S ratio are the lowest among the automakers.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>GM</strong></p> </td> <td> <p><strong>Toyota</strong></p> </td> <td> <p><strong>Honda</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>8.3</p> </td> <td> <p>16.9</p> </td> <td> <p>13.9</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>0.9</p> </td> <td> <p>0.9</p> </td> <td> <p>1.0</p> </td> </tr> <tr> <td> <p><strong>P/S</strong></p> </td> <td> <p>0.24</p> </td> <td> <p>0.50</p> </td> <td> <p>0.50</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>0.36</p> </td> <td> <p>1.12</p> </td> <td> <p>0.90</p> </td> </tr> </tbody> </table>


Coming to debt, the company enjoys the lowest debt-to-equity ratio and this can prove to be beneficial for the car maker. Recently there has been news regarding GM looking for a $10 billion revolving credit facility ($5 billion in three-year revolving loans and another $5 billion in five-year revolving) to cover its debts. With a low debt-equity rating of 0.36%, GM can easily absorb the extra $10 billion in credit facility.

Concluding thoughts
GM's 6.8% stock growth this month is the highest among the automakers. The stock is also up 12.2% YTD through late September and has increased 8.3% in the past year and around 16.7% since its last earnings release. The car maker is in the middle of building new grounds in China while it works on measures to improve its profitability. Current GM investors should hold on to the stock and new investors should consider the present time as a good one to invest in the company.

The current economic headwinds provide favorable entry points as stocks of all the major car makers are getting influenced by the tough demand situation in Europe. Presently, GM looks like a mixed bag with having huge success in China while facing massive losses in Europe. I believe there is a good chance the company can get through these troubled times, though it might take some time. While GM will continue to face headwinds in the near term, I believe its long-term outlook is promising as it tones down its exposure in Europe and focuses more on the Asian markets.


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