GM Could Stumble Even with High Profits
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In mid June, General Motors (NYSE: GM) concluded its annual shareholder meeting. In the meeting, shareholders expressed their displeasure with the low stock price and the lack of dividends. CEO Dan Akerson told shareholders that the company's main issues are the losses in Europe, its pension liability, and the uncertain economy in many parts of its market. He said that General Motors' European unit has lost money for the past 12 years, where there were too many factories and workers for the amount of cars it sold. The solution, he said, is that General Motors is restructuring its European unit by cutting the number of factories and employees to match the sales. He said that the company has concluded deals with English and Polish unions and is currently in talks with the German union.
Such talks are creating speculations that General Motors' Opel brand is considering closing its Bochum, Germany plant in order to cut losses in the area. This plant is said to have an annual energy bill of almost $50 million. It is also manufacturing older models and selling its cars cheaper in emerging markets like Russia and Turkey.
Despite posting a $7.6 billion profit in 2011 and another $1 billion in this year's first quarter, this translates into a $0.60 diluted earnings per share, way below the $1.77 it acquired on the same period last year. Its stock is trading between $20 and $22, about 33% of its IPO price, and less than half the approximate price at which the government would break even on its $49.5 billion investment made prior to the company's 2009 bankruptcy restructuring.
Car sales in China and Brazil surge for General Motors
General Motors sold 245,256 cars last month, which is an 11% year-on-year surge. It is the highest monthly total since August 2009. Sales of small and compact cars were up 16% in May versus a year ago, while full-size pickup sales were up 23%, mid-size pickup sales were up 34%, and full-size SUVs were up 14%
Sales in China jumped 21.3% year-on-year to 231,183 cars in the month of May. For the five month period ending in May, total GM sales in China stood at 1.2 million, an increase of 11.5% year-on-year. Vehicle sales were boosted by a surge in demand for its joint-venture vans (with SAIC Motor and Liuzhou Wuling Motors). SAIC-GM-Wuling sold 127,749 units in China, equivalent to a 35.9% year-on-year increase. The only weak spot was Cadillac's performance, which saw its sales slip 2.2% to 2,205 cars.
Its Brazilian subsidiary also saw a 37.6% increase in passenger vehicle sale last month. The Brazilian Motor Vehicles Manufacturers Association, or Anfavea, said that GM sold 45,826 cars in May, just 39 vehicles shy of Fiat's market-leading sales of 45,865. Volkswagen slipped to the third position with 45,664 cars sold last month and Ford came in fourth with 19,474.
The pension fund
General Motors has an underfunded pension fund, which in effect puts a large chunk of its earnings towards meeting its liabilities. It is looking to offer retirees with lump sums and annuities in place of monthly payments as reported by the company. Some 42,000 salaried workers, retirees and surviving spouses will be offered the option. This is around 36% of the 118,000 eligible workers.
USA Today said that General Motors will be outsourcing its white collar pensions to Prudential Insurance, a Prudential Financial (NYSE: PRU) subsidiary, for $29 billion. They expect to reduce the company's salaried pension obligations by $26 billion.
Chevy Cruze recall
Just recently, General Motors recalled 475,418 of its popular compact sedans to modify its under-engine shield. The recall covers 2011 and 2012 models of the Chevrolet Cruze sedans that were built at GM's Lordtown, Ohio plant from September 2010 to May 2012. The recall affects vehicles sold in the United States, Canada, and Israel. Another 10,000 units sold in Australia may also be affected, which the company is looking into.
The bottom line
General Motors has a market capitalization of $32.3 billion and an enterprise value of $15 billion. It has a price to earnings ratio of 6.2 which may mean that the stock is undervalued. Its stock value has lost around 32% in the past year, with its 52-week high at a little more than $32 in early July 2011 and its low at $19 in December. Its operating cash flow (TTM) is about $11 billion and is expected to increase with the recent revenue trends and sales. Earnings are still a little shaky, as the company still has an underfunded pension. I foresee that the shares of General Motors will likely remain stable, although undervalued, as investors are still wary about the U.S. government's high ownership in the company. I suggest holding shares, even in a slowly recovering automobile segment.
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