GM Could Turbo Charge Results Leaving Uncle Sam's Garage

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I gotta come clean and fess up right off the top.  Typically, I disclose stock ownership or other conflicts at the end of a Blog.  But I'm consumed with a far more serious conflict here.  From my first car in life:  a  '70 Chevy Nova I paid $400 for, and blew the pants off anything on the road--to today, 3 decades later my pride and joy 2-seater sports car from the late, great GM Saturn brand--I've been hopelessly addicted to GM vehicles.  My friends, with their dependable foreign wheels, have looked down at me for the better part of my life. So understand where I'm coming from as I boldly declare: Its time to buy General Motors (NYSE: GM) stock. Really.

Recent news that Uncle Sam will sell its remaining 32% stake in GM in the next 15 months is the catalyst that will ultimately lift GM's stock price to the level of the now successful business.

Former Stockholders and Bondholders Loss Is Your Gain

Lets start with the obvious: this is not your father's debt laden GM. 101 years after incorporating, GM ran off the financial tracks into a managed bankruptcy in 2009.  But in doing so, it largely shed itself of its multi-generational albatross: an absolutely unsustainable debt and legacy burden. In 2005, GM needed US total vehicle sales levels of 17 to 18 million units to rev up an operating profit. Thats a boom year of business.

Today, GM can make an operating profit at a RECESSIONARY level of just over 10 Million US vehicles.  GM's even earning big profits at this year's middling 14 to 15 Million sales level.  This is about as significant a structural change in the basic economics of a large company you'll ever find. Bankuptcy will do this to companies that survive.  I do not believe that investors, dizzied by previous wild GM stock rides, fully appreciate GM's new cost reality following last year's 4 year labor deal with the United Auto Workers union:  GM estimates total factory worker costs--which totalled $16 billion in 2005...and $11 billion in 2007...would be reduced to $5 billion annually.

And Hey, The Cars are Really Nice

JD Power Top Rated Vehicles Per Category:

Mid Sized Car:  Chevy Malibu

Mid Crossover SUV: Buick Enclave

Large Pickup: GMC Sierra

Large Crossover SUV: Cadillac Escalade

OK, another confession: I owned a Pontiac Aztek.  It truly was a piece of junk, living up to its billing by critics as possibly the worst vehicle of all time.  But guess what?  There's not an Aztek to be found in GM's  line up. They've stream-lined their Vehicle Division after shuttering Pontiac and Saturn.  You'll no longer find 5 GM vehicles under different brands competing against each other.  You want a mid-sized vehicle?  JD Power rates the newly restyled, 32 MPG Chevy Malibu tops in its class...mid-size crossover SUV?  JD Power also rates the Buick Enclave best in the market.  Large pick-up?  JD Power rates the GMC Sierra #1.  Large premium crossover SUV?  Cadillac Escalade gets top honors.  GM now offers a top rated or highly rated product in every class of vehicle.  The Chevy Cruze is a competitive small car entry earning favorable reviews and the Corvette compares favorably with sports cars 2 to 3 times more expensive.  Bottom line: GM's product line is world class competitive.

The Competition: Well Oiled, Global, and Fierce

But GM had better be world class competitive, because competitors are fierce, financially strong, and have gained ground the past generation --especially when GM sputtered.

Toyota Motors (NYSE: TM) gained US market share throughout the 1990s and 2000s thanks to bullet proof reliability.  The Camry became the default safe choice for Americans seeking a car requiring minimum repairs that would last for years.  The Corolla earned an identical reputation in the small car category.  As Toyota ascended to a near tie with GM in overall US sales, TM hit 2 major roadblocks: 1.) the reliability/quality moat that Toyota built the company around showed several cracks with increasing recalls and a PR disaster with the sudden, unintentional acceleration by certain models. In fact, Toyota just settled claims to the tune of $1 billion + on this issue.  And 2.) Toyota's model line up was getting stale compared with the bold offerings served up by the domestics. Toyota has recently been earning better reliability ratings and recently offered a redesigned Camry and Corolla.

Toyota also faces design challenges in its upscale Lexus Brand with popular new offerings from rejuvenated competitors Mercedes, BMW, and Cadillac. But Toyota, with its $140 billion in market cap, is fiercely  competitive. Design challenges are cyclical. They'll get it right.

Honda Motors (NYSE: HMC) is hoping to emerge as the hybrid choice--introducing several new models this year based on its existing hybrid technology.  Honda, like Toyota, has emerged in the US as a safe, reliable option for a generation of drivers who appreciate Honda vehicles sporting  the lowest "cost of ownership." Mid-sized Accord and compact Civic always rank at or near the top in JD Power and Consumer Reports Ratings. But those popular vehicles have also lost market share to bold looking, improved competitors. Honda just completed an emergency redesign of its hugely popular Civic after poor reviews of its aging look and features, and also redesigned the Accord and popular CR-V. Honda's upscale Acura brand consistently ranks at or near the top of reliability ratings, but has recently lost some competitive luster due to the previously mentioned rejuvenated upscale brands.  

But with consistent double digit sales and earnings growth, a strong balance sheet, and a reliability moat earned over a generation...Honda, like Toyota, has the resources and expertise to navigate through cyclical design challenges.

And if the generational Toyota and Honda challenges weren't enough, GM has a new headache--right in its own backyard: Ford (NYSE: F).  Ford's image in the US has been bolstered by the fact it was the only domestic auto maker that did NOT need a bailout from Uncle Sam. Ford, like GM realized it needed to break through with bold, attractive products to crack the stiff foreign competition.  Ford earns rave reviews with its attractive, fuel efficient smaller cars--delivering on its promise to attack that segment traditionally dominated by TM and HMC.  The Ford Focus and Fiesta are paying immediate dividends from Ford's major investment in small cars offered at prices that generally undercut the competition.  Ford's Fusion is an attractive,  increasingly popular mid sized offering. And of course Ford enjoys strong sales of its legendary sports car, the Mustang and its ever popular Ford Trucks.

Ford, like GM, is suffering huge losses in Europe. And due to the fact Ford never went bankrupt, it sports a much higher debt burden. 

Wall Street Doesn't Want Washington In the Passenger Seat

But competition is not new to GM.  I believe GM stock is cheap for 2 reasons:  1.)  A "Show Me"  attitude by Investors burned by the old GM (maybe even former Aztek owners) who want to see several years of demonstrated Financial Success, even though investors know GM is structurally better than the company they grew to dislike.  And 2.) the fact the US Treasury still owns a third of GM Stock.  But the Government agreed this week  to sell stock back to GM with the promise to unload all of its shares in 12 to 15 months.

I believe investors will be rewarded buying GM stock before the rosy concensus that will follow the US Government's exit.  Investors will then turn to GM's fundamentals and discover GM is earning serious money. 

GM's North American revenues are up 7% and their strong emerging markets penetration is the envy of the domestic industry--with double digit revenue increases in overall international operations. GM is the US product of choice in China (Buick is a leading China Brand) and GM is strongly competitive in Brazil and India. Quite simply--even through the US Financial Crisis--GM has made huge investments in sections of the world creating the most new drivers.  Yet the stock price is just a little over half the multiple of the general market.

GM Earnings:

2012     $3.26/Share   8.3 PE

2013     $3.72/Share   7.3 PE

2014     $4.63/Share   5.9 PE

Earnings are on track for $3.26 a share this year...a PE of just over 8.. ..in 2013 analysts' concensus is $3.72 for a PE just above 7...and in 2014 GM's PE is under 6.

The one glaring negative in the GM story is horrible results in Europe. GM will continue to suffer large losses in Europe due to a double whammy: GM cars are less popular there than other parts of the world and much of Europe is mired in a deep recession.

But GM sports a sub-compact stock valuation, with those strong European headwinds.  Importantly, GM is restructured to make money even in a slow growth world. Just a little tap on the gas with higher octane global GDP---could seriously turbo charge GM's financial results. Hop in, its time to take GM for a ride.

 


Grahdodd 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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