General Motors: Where is it headed?
Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Detroit automaker General Motors (NYSE: GM) is in its recovery phase after it suffered in 2009 and was bailed out by the government. However, there is still a lot that the carmaker needs to learn. The company’s 2010 IPO price was $33 and now it trades almost 25 percent lower at $24.80. This doesn’t speak that great of the company. Nonetheless, let’s analyze the performance of the company and its road map to get back on track.
Is Ally the right ally?
GM has been working towards getting things right in Europe which is the automaker’s major market. As per a Bloomberg article, the Detroit Company is considering to acquire Ally's auto lending arms in Europe and Latin America. Though one of the prime markets, Europe has not been doing well and is absorbing chunks of profits from the company’s pocket. So the entire idea of taking over a struggling unit as Ally to fix the ugly European operation doesn’t make sense to me. I agree that Ally’s $16.4 billion of assets in the two regions would increase GM’s assets to double, however there are many better ways that the top US auto manufacturer could utilize its money rather than draining it in such an unpromising deal. How much would it help to revive Opel, Vauxhall and the operation of other units in Europe is extremely doubtful.
GM is a dicey bet for a number of factors.
Where is the company falling back?
The first and foremost thing that one looks into while assessing the health of a company from an investment point of view is the profitability of its business and the growth that it’s witnessing. GM doesn’t succeed in this test. The company’s second quarter profits slipped 41 percent compared to a year ago quarter while the first quarter profit was even worse witnessing a drop of 62 percent against the 2011 quarter.
In addition, as discussed earlier, the automaker’s European operation has brought nothing more than frustration. Hard to digest, but it has accounted for a total of $14 billion in losses in the past 12 years. The first quarter of the year saw a loss of $256 million in the region.
Moreover, the company’s apparently promising Chevy Volt isn’t living up to its expectations. In fact, the company is said to be incurring a loss of $49,000 per car, though GM disapproves saying that it isn’t correct to spread the cost of production among the first set of cars. It should be distributed over the life of the car. True, but this means that the company is well below break-even. Also, given the feeble demand for this model, so much that GM had to temporarily close down its units for 5 weeks due to surplus production, I am not certain as to how much profitable this would be. Since its launch, GM sold 16,669 Volts out of which 13,497 units were sold this year till August. The automaker had expected to sell 40,000 units per year, but the present numbers are too low to live up to the expectation.
Other than this, the competition in the auto industry is getting extremely fierce particularly with the strong comeback of Toyota (NYSE: TM) and Honda Motors.
Fighting the mighty foes
Foreign automakers have made life tough for the Detroit automakers including GM, Ford (NYSE: F) and Chrysler. The Big Three have been losing market share of late to their foreign counterparts who are making a strong comeback in the domestic market. GM’s market share stood at 18 percent which is down two percentage points compared to last year. Ford’s story remains the same with a market share loss of 1.2 percentage point. In all this, Toyota stands to be the winner which experienced a market share gain of 1.7 percentage points.
This is not all, competition is going to get stiffer when Detroit faces its Japanese, Korean and German rivals in the mid-sized sedan segment. This fall, the midsize sedan segment is going to see the redesigned 2013 Ford Fusion and GM’s Chevrolet Malibu. However, the two introductions are going to face road bumps in the form of Toyota Camry, Honda Accord and Nissan Altima. These three market leaders are doing extremely well in this segment and the redesigned versions have worked pretty well. Other than this, the market also has Hyundai Sonata and Volkswagen Passat competing in this segment.
Since the time Toyota and Honda stated gaining grounds in the mid-1990s, home players GM as well as Ford started experiencing a hard time losing their market share to these foreign entrants. It’s time that these players start doing something to regain the lost market, particularly as the midsize family car segment is blooming with sales up 23 percent through August. The credit partially goes to the innovation, better technology, and higher fuel efficiency with premium design that made this segment grow more compared to the industry which grew 15 percent.
GM may be recovering from the financial crisis, thanks to the bailout package, but there’s a lot left to be done. Given the growth in the midsize sedan space, GM can make plenty from this opportunity or just lose it to Toyota and Honda again.
However, things might not be as bad.
GM is moving towards the biggest product launch in its history with the revamp of about 80 percent of its present lineup in 2 years’ timeframe. In addition, while the European market appears dull, the Asian market looks attractive where the company posted a 7.3 percent sales growth over the previous year in China. The company expects the Chinese market to be a big revenue driver and estimates the economy to grow to 30 million vehicles market by 2020. GM is investing in this economy despite the slowdown in its growth by keeping in mind the long term benefit it could have. Things are getting better for the company which is evident from its ten consecutive quarters of profitability.
The company has worked hard to recover from bankruptcy. It can’t afford to take any wrong step and needs to be more careful in investing in the Ally unit. The Asian market which looks more promising could be a safer bet. The new product line and the encouraging Chinese economy where the automaker’s market share is getting stronger look good for the company. This being said, I would say one shouldn’t get swayed as it is important to see how all this reflects in its future quarters.
Compare and Contrast
Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford’s stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of The Motley Fool’s top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.
liveinvestor 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.