GM's Transition Makes Investors Wary
Jane is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
See the USA in Your Chevrolet
What’s good for General Motors is good for America
Those memes were embedded in the GM (NYSE: GM) which was as American as Coca-Cola soft drink, Tide detergent, and Colgate toothpaste. Now GM seems to be pulling up some of those roots. If that's what's going on, then investors ought to be wary. Transition often has hidden landmines, as we witnessed when Facebook went public. On the other hand, look at how Barnes & Noble is escaping Border's fate through the technology of the Nook + customer service.
GM won’t be having commercials in SuperBowl 2013. The symbolism linked to that decision is huge. The sales consequences could be just as big. Car commercials on the SuperBowl are an annual bonding/branding ritual. Americans wait to see how GM would present itself and its lineup of cars and trucks. Not being there sends a message. That message can be read: We don't care enough about you consumers to put on a show. And American car buyers can push back and remember that they haven't driven a Ford lately.
At the same time as GM is exiting the SuperBowl, it is sponsoring the team of European football stars who make up the Manchester United. It won't say how much this is costing it. It is only saying that the money isn't coming out of what is being saved from the cuts in the U.S. GM also pulled advertising from Facebook. Will there be other promotional moves distancing itself from its American DNA?
Sure, it's also possible that GM could become innovative in its cost-efficiency and put itself out there in America in a low-cost way that grabs attention. Baby Boomers remember how Chrysler did just that during the Iacocca turnaround. The press hounded Chrysler to keep doing more and more coverage on its folk hero leader and the then-revolutionary minivan. Influentials like Harvard Business School did case studies of the restructuring. And other corporations flocked to Detroit to study the Chrysler miracle and become sources of word of mouth positive buzz.
That could happen for GM, but right now it's unlikely. Like Avon, Sears and H-P it is rejecting its past but hasn't put together a vision for the future, at least not one we can believe in. Its present is scary. The company's margins are subpar. They include: operating 3.78%, net profit 4.06%, gross 12.71%, EBITD 7.75%.
The risk associated with GM's recent moves is intensified by the timing. The U.S.economy is in better shape than those of many nations around the globe. Folks in America have been buying cars. That's all concrete. In contrast, for example, the great promise of China remains that: A possibility. In addition, it hasn’t yet produced significant profits for GM. There the market is fragmented and only time will tell which brands consumers try and stick with.
Do the math. In North America, for Q1, GM earned $1.69 billion versus $1.3 billion in Q1 for 2011. Yet, because of problems in Europe, its Q1 profits declined about 70% from Q1 of 2011 to $1 billion. Lots of other companies, including Staples, have been hit hard in their European operations. That's not the space to be in right now and might not be that for years to come.
Many are aware: GM’s overall global sales were up about 3%. Given those 2.28 million vehicles sold, it’s again the largest car manufacturer on planet earth. But that number in itself doesn’t mean anything. No number does. Facebook statistics indicate that it has many more non-U.S. members than U.S.-based. So? There are those predicting Facebook might not be around in five years or become a shadow of itself as had the earlier players in the Internet space.
GM’s global presence hasn’t been able to inspire confidence in too many investors. The stock is at 21.25, within a 52 week range of 19.00 to 32.08. That’s why stock watchers are scratching their heads as to why Berkshire Hathaway (NYSE: BRK-A) has purchased 10 million shares. Recently, Berkshire Hathaway has also invested in General Media’s 63 newspapers. The newspaper industry has not been proving out to be a profitable line of business. Perhaps the Warren Buffett team, with its eye on succession issues, is also pulling up roots on its philosophy of investing.
In volatile times, GM is not alone in aiming to exit a past. Looking at the experience of other companies reinforces how tricky a business it is.
Take JC Penney (NYSE: JCP). With a lot of fanfare Apple retail alumnus, now Chief Executive Officer (CEO) Ron Johnson experimented with Fair and Square. He was determined to stop the history of discounting which had eroded margins. One tactic had been to eliminate the very term “sale” and replace it with phrases like “month long value.” Nice bit of 1984 linguistic re-engineering.
Among the resulting disasters, last May same-store sales were down 18.9%. Reuters reports that Johnson is backing off. The issue is how much will it be and how quickly. For now, “sale” has returned to the marketing lexicon and the sale will be configured for shorter periods than a month. But that’s a long way from adopting the kinds of tactics, such as daily deals, which have made Kohl’s hot. So far, investors are not wowed. Penney stock is at 24.27, within a 52 week range of 23.44 to 43.18.
Then there’s PepsiCo (NYSE: PEP). That’s not a disaster story, at least not yet. Its stock didn’t fall off the cliff when its CEO Indra Nooyi got a bee in her bonnet to transform the historic fun of sugar water and salty snacks into healthy fare. Incidentally, that has included hummus. As investors have noticed hummus hasn’t become a mainstream snack and a symbol of good times shared with family and friends. The stock is at 67, within a 52 week range of 58.50 to 70.75. That is considered by some to be undervalued. Could returning to its pleasure roots unlock value in the company?
Of course, there are companies like AT&T (NYSE: T) which had no choice but to leave the roots behind. Landline was the communications vehicle our grandmothers used. AT&T has become a leader in, among other services, wireless. Along the way it also became customer-centric, ditching its Ernestine The Operator reputation of not having to care. The representative who guided me through the installation of my ultra high speed DSL was half earth mother, half geek. The stock at 34.06 is near the 52 week high of 34.41.
Then there are the big question marks out there about other companies which could pull up roots and not plant anything in their place which will flourish. Among them are that bunch of former Internet high-flyers, ranging from Yahoo! to AOL. There are also the banks like JPMorgan Chase which built their profits on the kind of risk-taking that is now framed as “reckless.” In addition, there are those like Starbucks which don’t seem cautious enough about preserving the core business.
Around SuperBowl time next year let's check in to assess which companies in transition are getting it right.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend General Motors Company and PepsiCo. 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.