GM Surprises Market -- Not in a Good Way
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General Motors’ (NYSE: GM) shares are down by as much as 3% during intraday trading on July 12, nearing its 52-week price low of $19/share, on a very curious news tidbit just released by the corporation. Karl-Friedrich Stracke, who took over GM’s European division from the retiring Nick Reilly this past January, has stepped down from the leadership position to take on “special assignments” with the corporation’s CEO Dan Akerson.
The news comes just two weeks after the struggling European operation’s leader presented a new plan to rebuild its Opel and Vauxhall brands, and has obviously left investors increasingly uncomfortable regarding the future outlook of GM’s European money trap. Steve Girsky, who has been the head of Opel’s board of directors, will take on the division’s chief role while the company seeks out Stracke’s permanent (hopefully) replacement. The leadership change is Opel’s third over the past three years.
Change Can’t Come Soon Enough
There is no doubt that it is crunch time for General Motors. In less than two years since the automaker’s re-launch into the public market, it has one of the strongest product portfolios that consumers have seen in decades. With losses continuing to pile up from its European division, with Japanese automakers including Toyota (NYSE: TM), Honda, and Nissan enjoying huge strides from post-Japanese tsunami volume lows, and with key emerging markets starting to show growth strains, the time for ramped-up profitability cannot come soon enough.
By far the biggest thorn in GM’s side, as if the almost 24/7 news coverage on the topic does not indicate, is the automaker’s extremely inefficient European operations. General Motors had the opportunity to divulge of the Opel unit following its Chapter 11 filing in 2009, but deemed the European market and the strength of the Opel/Vauxhall brand names (despite efficiency issues, they aren’t unpopular in certain markets) too key for a post-restructuring resurgence. Since then, losses of over $1 billion between 2011 and the first quarter of 2012 bring the cumulative division loss to more than $16 billion since 1999.
Unfortunately for the automaker (and stomach-churning for investors), there is little that can be done to alleviate the pain in the short run. Several general tactics have been discussed – add new models to the Opel/Vauxhall lineup, seek to sell the division’s vehicles in newly emerging economies, potentially move other GM production to European-based plants to fill some of the unused capacity in the region – but nothing concrete has yet to materialize. It is more or less a waiting game with the existing labor contracts GM has, as it has several plants that it would like to close but can’t for the time being.
Trouble All Around
Although it will hardly make General Motors management feel any better about the situation, the European story is not too different throughout the rest of the industry. Following GM’s announcement, France native Peugeot announced its first plant closing in the country in more than 30 years. Similarly, the corporation plans to supplement its original 6,000-employee layoff announcement with an additional 8,000 job cuts necessary to streamline operations.
France-based Renault also recently scrapped its original 2012 sales growth projections, which called for a modest 3-4% year-over-year increase. Although no updated guidance was presented, the small automaker disclosed that declines in Euruope (-15% in 1H 2012) were more than offset by sales gains outside the region.
Even GM’s American counterpart Ford (NYSE: F), via a recent New York Times interview with CFO Bob Shanks, warned that second quarter losses outside North America could grow to almost triple the $190 million lost internationally in the first quarter. With a very realistic $600 million loss hitting Ford’s bottom line, chances of presenting investors with solid 2012 results are becoming increasingly less likely.
Finally, even luxury automakers, which have held up the best thus far, are tending to trend down. German natives BMW (NASDAQOTH: BAMXY), Audi (NASDAQOTH: VLKAY), and Mercedes recently posted European sales results, with BMW’s volume on par with 2011 levels and the latter two showing very minimal single digit gains.
What to Think?
With few supplementary details being released by General Motors, it is very difficult to analyze upper management’s decision with Stracke. Several other Opel board members were reported to be caught completely off-guard with the news, but it also appears that many were aware of the friction between Stracke and GM’s U.S.-based management regarding the pace of the change at Opel. There’s only one thing that is certain – there is likely to be a follow-up announcement within the next several weeks that will shed more light on the motives of the management change. GM’s European failings are too hot of a topic to keep investors in the dark too long.
Despite the ongoing issues in the European sector, there is still surprisingly quite a bit to find attractive in GM’s post-IPO performance. The corporation is still chugging along in China, with first half 2012 sales rising 11.3% as compared to the same period in 2011. Similarly, the automaker continues to make the most of the United States auto market’s resurgence. Last month's domestic sales were up 16% year-over-year and represented the highest volume month since September 2008.
GM has had great response with many of its new products, with Chevy Malibu sales surging 32% in June 2012 versus the same month last year, and with Chevy Sonic sales hitting 42,000+ units in the first half of the year. Compared to the Sonic’s predecessor in the Chevy Aveo (which sold less than half of that amount in the first half of 2011), the new entry into GM’s small vehicle lineup is a huge hit. Similarly, with the Chevy Cruze still selling in high volumes even three years after its initial release, it is certain that General Motors is gaining steam in the compact, fuel-efficient vehicle market. The importance of such an improvement cannot be understated, as General Motors has never really had a meaningful piece of this crucial consumer segment.
Lastly, domestic sales of Theta (Chevy Equinox, Cadillac SRX, and GMC Terrain) and Lambda (Chevy Traverse, GMC Acadia, Buick Enclave) products were up a collective 25% in June, and are up high single digits in the first half of 2012. All of GM’s four domestic brands posted double digit increases last month.
Approaching new post-IPO per share price lows, and selling at a mere 1x last year’s pre-depreciation operating earnings and about 1x book value, GM shares are looking increasingly enticing even despite the European losses. Prospective investors should keep a pulse on the corporation as it is sure to release some follow up information to the today's announcement, and should be especially cautious about purchasing into bad news – even if the shares are absurdly cheap.
gibbstom13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.