What Lies Beyond Q3 for This Automaker
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last time I discussed General Motor's (NYSE: GM) Q3 earnings. The US automaker beat analyst forecasts on both revenues and earnings and the stock jumped over 10%. Here's a quick look at what you need to consider, as an investor, in GM's next quarters.
Looking Beyond Q3
- For one, Hurricane Sandy is likely to hit the East Coast automobile sales in the current month. Moving into the fourth quarter, consumers in the region are likely to feel the burden on their pockets related to home repairment costs. However, hundreds of vehicles that got destroyed in the storm will at the same time increase their demand. Also note that gasoline prices in the region have increased which can boost demand for hybrid cars. In that department, GM's biggest competition comes from Toyota's (NYSE: TM) Prius hybrid which has remained the most-wanted hybrid car of the year.
- CFO Dan Ammann told CNBC that GM's impressive revenues were a result of gains from both pricing and volume. Bear in mind that most companies either keep pricing low and win from higher volume sales, or sell less volume and win from high pricing. Speaking in terms of figures, Dan Ammann revealed in the earnings call today that Q3 volume was $300 million favorable and price was $600 million favorable, primarily due to the strength of new products launched this year. Clearly, GM is improving its position in the market where it doesn't have to discount its cars to sell them. We may be looking at an improving brand image for the company and can expect a boost in its margins in the coming quarters.
- The company acknowledges the fact that it needs to further improve its brand image which got tarnished post-bankruptcy. The Government's involvement in the business is another reason why the general public doesn't speak good of the company, which is almost always labeled as 'Government Motors'. GM executives are pushing the Government to release the company of its strong-hold. However, investors need to look out because if the Government sells off all of its stakes, this could mean GM's shares (initially) heading south.
- The company plans to launch 23 new models and 13 new engines by 2016. At present, GM has the oldest North American model lineup in the industry which it plans to revamp in the next 2-3 years. Also, the company is often seen as an automaker for the older generation. Honda (NYSE: HMC) and Toyota cars are generally more liked by the younger generations. Good advertising that reaches the younger lot and effective use of social media (like its Facebook page) can help it beat its rivals.
- The company is finally taking steps to mitigate European losses, most of which are attributable to its German subsidiary, Opel. GM's Vice Chairman Stephen Girsky gives some positive figures that lessen my pessimism regarding its Europe operations. GM is launching Opel Mokka small SUV and the Opel Adam small car in Europe which are due to be out by the end of this year. According to Girsky, GM has demand exceeding supply at the moment with orders of 45,000 Mokka received so far, more than the company can fill this year. Its alliance with PSA Peugeot Citroen in France will also likely prove a boon to its operations in Europe.
- Some cost reductions and improvements in the next quarter are going to come in the form of GM's pension liability cut by $29 billion and the company's plans to transform its IT infrastructure from the earlier outsourced IT model which was more expensive and inefficient. The new IT infrastructure, as the management says, will help GM manage its business with more speed and precision.
Putting everything into perspective, I see the company improving its performance in the years to come. Big value investors like David Einhorn making bullish calls on the company and the stock's performance post-Q3 earnings report, all indicate optimism on The Street. Increasing debt and declining revenues are however a strong concern. GM is a high beta stock with a riskiness almost twice the market average. It is currently trading at a 23% discount to its IPO price of $33 and approaching its 52 week high of $27.68. With a forecasted EPS of $3.14, its forward P/E of 8.12 gives GM a fair value of $25.50--exactly the price it closed on yesterday. If you own the stock, hold on to it. If you don't, now is not the time to buy. Wait for a dip!
Know What You Own
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PalwashaS has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend 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.