GM Earnings Solid, But are they a Buy in 2012?
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you took the GM (NYSE: GM) plunge pre-earnings announcement the risk you assumed is paying off to the tune of a 6%+ pop. GM shares were ridiculously cheap before the announcement (and still are), but the company had more outstanding questions than Ford (NYSE: F), Honda (NYSE: HMC) and the ridiculously overpriced Toyota (NYSE: TM). As a result many investors stayed away until they got some confirmation things were moving in the right direction. Consider it confirmed.
Long a proponent of Ford and Volkswagen in particular, the industry as a whole has been the subject of bullish sentiment -- me included -- for sometime. The first write-ups of Ford and Volkswagen were in late December when F was trading at $10 a share and Volkswagen $27. Even with the expected run-ups already seen, these both remain tremendous values. Macro economic factors are driving much of the deserved good tidings, as well as financials that are significantly improved across the auto industry board.
Before tackling GM a quick note on HMC and TM too. For a cyclical stock, even as the cycle swings upward, a nearly 29 P/E is awfully steep -- but that’s where Honda’s sitting right now. And Toyota is nearly twice that, trading at over 54 times earnings. This compares with a mere 6 P/E for GM, and that's after today’s tidy little run.
GM Today and Going Forward
Not everything came up roses for GM but all in all, only the true pessimist would be overly disappointed. Europe, South America and especially Opel were drains on the company in Q4. To their credit management isn’t trying too hard to sugarcoat these areas of weakness. According to CFO Dan Ammann, “We obviously have work to do ... and a long way to get to the objectives we ultimately want to get to.”
It’s the poor results in those areas, along with the need to get expenses in line, that really hurt the bottom line. Operating margins took a hit in Q4, enough to negate the company’s $1.1 billion increase in revenues over 2010. Even with the hike net income to shareholders was identical to Q4 of ’10, and worse if you remove one-time items from each of the quarters.
So why the joyous cheers heard from investors? The annual numbers were impressive no matter how you slice it. Part of the reason was the lower than expected pension costs certainly, but key indicators like revenue, net income (even after one-time items) and growth in China all bode well for the once struggling company.
The question now as GM share prices rise is do you believe the company will grow the European and South American markets, get Opel in shape and cut costs? If so this is going to be a fun ride for the next year and maybe longer. If not enjoy the short-term run and trade on momentum ... there’s bound to be a lot of it. As for me, I’m betting on company management to address the needs and continue making big, positive strides. GM is a strong buy.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.