European Struggles Nothing New for GM
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General Motors (NYSE: GM) had me scratching my head about its recent announcement that it would be a sponsor of the Manchester United Soccer team, for a cool $559 million. In return, GM's logo will appear upon team jerseys for a period of seven years.
I know that Manchester United is about the best known team, worldwide, of any team in any sport in any country, with over 650 million self-described fans. The amount is double what current team sponsor Aon (AON) pays on an annual basis, but my concern is not so much the amount, but rather what possible benefit such a major commitment to the iconic European club can do for General Motors or its shareholders.
GM recently posted second quarter earnings of $1.48 billion, or $0.90 per share, down about 41% from the second quarter of 2011's $2.52 billion, or $1.52 per share. Analysts had been anticipating about $0.74 per share, so the stock market reacted positively to the news.
The story behind the big earnings drop was, of course, Europe. GM's results there went from earning $102 million in the second quarter of last year to a loss of $361 million in the second quarter this year. That puts GM's total losses in Europe at nearly $17 billion since 1999, and the current combination of not just the sovereign debt crises, but widespread recession and low employment in the continent make it harder than ever before to make money. And now, GM doubles down with a massive advertising campaign?
Europe holds even more problems to GM than continuing losses. GM acquired a controlling interest in Saab in 1990, and over the next twenty years essentially “Americanized” the once quirky brand, diminishing its limited yet strong appeal. As GM was imploding late last decade, GM finally dumped the Saab brand in 2010 on small, niche car maker Spyker. Predictably, Spyker lacked the resources to market its Saab brand effectively, and it foundered. Now, Spyker is suing GM for $3 billion, alleging GM tortuously interfered with Saab's plans to receive investments from Chinese sources, forcing Saab into bankruptcy. As an aside, the Swedish government plans now to convert Saab into an electric car company.
Meanwhile, in the wake of GM's advertising investment, the company has sacked its marketing chief, Joel Ewanick. Technically, Ewanick resigned, but GM made it clear that the departure was really due to Ewanick's failure to live up to GM standards in a broader context. But for a company like GM to spend nearly 20% of its worldwide advertising budget on a market that has shown no ability to generate sustained profits for two decades is absurd. For about 10% of its British commitment, GM could purchase long term naming rights for its hometown baseball team stadium from Comerica (CMA), the bank that left Detroit for Dallas several years back.
In July of this year, GM sold, generally through partnerships, over 200,000 vehicles in China, 15% more than the year before. It has now been several years that Chinese sales have been equal or ahead of vehicle sales in the United States. The Chinese sales are profitable, and I wish that GM would put even more resources into that market rather than spend over half a billion good dollars chasing a bad business model in Europe. When is that economy going to recover enough to give consumers confidence? I simply do not know. But GM lost money most years in Europe long before the European Union's economic collapse.
GM is far from alone in struggling in Europe. Ford's (NYSE: F) earnings have also been deeply hampered by losses in Europe. Ford saw a whopping 57% decline in net income during the second quarter, due to a $404 million loss in Europe. European based automaker Fiat (FIATY) lost money in the second quarter, despite solid profits from its Chrysler unit.
Meanwhile, GM's arch enemy, Toyota (NYSE: TM) is faring very well. Production limitations in 2011 caused by the early 2011 earthquake and tsunami paved the way last year for GM to reclaim its post-World War II position as the world's largest auto maker. Through the second quarter of this year, it is likely Toyota will take back that unimportant crown.
In its fiscal first quarter of 2013, Toyota sold 2.27 million vehicles worldwide, a stunning increase of 86% from the year ago quarter. Toyota's largest sales market is North America, and there Toyota's sales increased 141% from the depressed levels of a year earlier. Toyota's sales in Europe increased 20% versus the year earlier, but still were below its long term average in that troubled area.
Toyota's overall revenues increased 59% from a year earlier, to $70.3 billion, and profits came to $3.7 billion in the quarter, up monumentally from the year earlier total of $14.1 million. Earnings per share came to $2.30, far exceeding analysts’ expectations of $1.97.
Some of Toyota's earnings are coming from pent up demand. But Toyota is the world's current leader in hybrid vehicles, and has indicated substantial redesigns of core models such as the Avalon and Corolla. I am looking for fiscal earnings of a little over $7 per share, giving the company a current price to earnings ratio of 11.5, a premium to other automobile manufacturers. But analysts see five year profit growth averaging over 40%, for a 5 year PEG of a miniscule 0.27. By these standards, Toyota is about as undervalued as it gets, and worthy of a long term buy consideration.
Honda (NYSE: HMC) also posted exceptional first quarter 2013 numbers, aided by comparison with a historically weak first quarter of its fiscal 2012. Honda offers a broader product line that most of its competitors, with leading positions in motorcycles, lawn equipment, and even small jets. Revenues increased in the quarter by 42% to $31.2 billion, and profits quadrupled to about $1.7 billion, or $0.92 per share. Again, analysts see 5 year growth averaging 35%, driving its 5 year PEG down to 0.24. Honda's auto division did particularly well in China, where its volume in the quarter more than doubled in the quarter from the year earlier, but still amounted to just 52,000 units. Honda has the ability to exponentially increase its sales in China in coming years.
I am a fan of Honda, and with the company being as undervalued as the PEG suggests, I urge investors to consider adding this company to their portfolio sometime this year.
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