GM: 3 Reasons Not To Expect Huge Gains In Q4

By Maxwell Fisher - July 17, 2012 | Tickers: F, GM, HMC, TM | 0 Comments

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Following the overall market trend, General Motors (NYSE: GM) is down quite a bit since late February. This quarter has shaved about $8 off the price of its stock, which now hovers right around $20. This could be a very good thing for investors who are looking to buy stocks now. There is an overall consensus that GM could increase in price quite a bit, with the average price target above $32. Because auto purchases are essentially investments, the success of GM relies on continual market stability. Auto purchases will decrease if the macroeconomic environment gets worse. The good news is that the economy is becoming more resilient.

The first bit of news is a word of caution. Subprime lending is quickly creeping into the United States, with overall subprime lending 20% greater this year than last year. Much like mortgage-backed securities, these subprime loans are undergoing securitization and are packaged along with leases and rentals. The key difference is the fact that these subprime securities are sold with high collateral requirements, lowering the overall risk of the investment. In fact, they are considered to be "overcollateralized" with the collateral exceeding the size of the deals, thus cushioning the blow in the case that any of these loans went sour.

In terms of company finances, GM is taking steps to decrease the pension liability which is reportedly underfunded by a staggering $25.4 billion. To decrease this liability GM is offering some of its employees $500,000 to $1 million to buyout their pensions, a move that does not sit well with many. The grand total of salaried employees it is looking to move from its pension payrolls is 118,000, with the total of hourly employees totaling about 400,000. This move has so far been met positively by the markets, but I don't think we will see the full effect until the full amount that is underfunded has been taken care of. I also expect it to tarnish GM's name, if only for a short time. Having taken bail-out money from the government, GM has continually been under scrutiny and faced hostility.

But as with many industries, the auto industry foresees weak margins and a slowdown in Europe. This would hit the automobile industry especially hard due to the investment-like nature of the purchase. Although its CEO does not foresee an economic meltdown in Europe, he does expect European sales to lag. This is not surprising given both the situation in Europe and the smaller demand across the continent. Moreover, GM has lost over $16 billion dollars in its European operating since 1996, so you can expect this year to continue the tradition. To some extent, it is becoming harder and harder to envision GM or its counterpart Ford (NYSE: F) to remain in Europe if these abysmal numbers continue.

For all its worth, GM is looking to turnaround operations in Europe with its Opel line of cars. However, that seems to be where the plan stops. While there might be a defined strategy that the public does not yet know about, the outline is very imprecise, stating that a turnaround will come from "massive investment" and a "market expansion strategy." With GM's CEO openly discussing the likelihood of a slowdown in Europe, I hardly see either of these plans working, at least not anytime soon. Unless GM has a strategy for the restructuring of European finances, I see these two plans making little headway.

The other major US auto manufacturer, Ford, is suffering the same fate as GM. Like GM, it is seeing lower numbers this quarter, with the second half of the year also looking undesirable. This had led to an overall decrease in Ford's operating profit. In fact, Ford has sold a seasonally adjusted low amount of medium to heavy duty vehicles during June. This bad news could certainly carry over if the economic forecast does not increase, but I imagine that a downtick in unemployment figures would help sales a bit. Even so, there is enough uncertainty for analysts to begin downgrading Ford stock from a buy to a hold recommendation. Given all the information, I can't blame them.

While the overalls conditions in the auto industry hit all of the major auto manufacturers, it has done so to differing degrees.

Take auto manufacturer Volkswagen, which has remained fairly resilient during the economic turbulence. Part of this is due to increases in production in China, a market that even during times of economic turbulence has the capacity to sustain a high growth rate of automobile purchases.

Not all auto manufacturers are facing a downfall. Both Toyota (NYSE: TM) and Honda (NYSE: HMC) are expected to see large increases in sales this summer. As stated before, this is in large contrast to Ford's June sales, which are at the lowest point they have been in a while. Having said this, nobody in the industry is looking bad, just not as good as others. Even tiny Tesla (TSLA) is looking better, as it is now up 10% in 2012 and up more than 62% from its July 2010 opening price.

With only a handful of manufactures supplying almost 80% of all cars, GM is undoubtedly in a very good position. Some stability would certainly help the company to sell more cars, but what industry would not be helped by a stable economy? I expect GM to stay pretty even throughout the next quarter and maybe quite a bit longer than that. A lot depends on the economy, but strong competition will also be holding it back. Watch for Honda and Toyota to rise but the American manufacturers to stay relatively flat.

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