GM: The Most Valuable Auto Company?

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When General Motors (NYSE: GM) CEO Dan Akerson said that GM would, before long, become the world’s most valuable automotive company, we were all ears. The CEO was at the Fairfax Assembly and Stamping plant where he had gone to announce a $600 million manufacturing investment.

So after battling with bankruptcy and sluggish economic conditions, this is the new goal that the company has set for itself. But the question that arises is whether this is setting the bar too high! GM’s market capitalization is around $37 billion, no comparison to the likes of Toyota, with $324 billion, or Volkswagen (NASDAQOTH: VLKAY) at $73 billion. It is even trailing its next door neighbor, Ford (NYSE: F), which is approaching the $50 billion mark. If you are wondering what is it that GM is banking on to pull its stock value to the level of market champion, the answer, by the CEO’s self admission, is margins.

How are GM’s margins?

GM has come a long way from its bankruptcy days, and is now making healthy profits. It is still the world’s leading auto maker, coming a close second to world number one Toyota, and is witnessing strong demand in its core US market. However, it is still way behind peers Ford and Volkswagen in terms of margins.

Ford put up full year 2012 margin of 10.4%, aided by strong sales of F-series pickups. These trucks are extremely profitable, accounting for most of its global profits. Meanwhile, the company’s ”One Ford” strategy has helped it reduce its costs by leaps and bounds. In comparison, GM posted a 7.8% margin in the third quarter. While the company’s fourth quarter and full year release is just around the corner, the margin are expected to remain in the 7-8% range. The earnings gap between Ford and GM is becoming increasingly worrisome for GM followers. The problem with GM is that most of its lineup is of an older vintage, which often makes sales heavily dependent on dealer incentives.

The other factor which has been a key to margins for automakers has been results in China. While GM has been a market leader in terms of volumes in China, its profitability lags peers like Volkswagen significantly. This is because the small cars, like Wuling, which are popular here, are quite low on profitability. The other reason is that the majority of the profits goes to the Chinese joint venture partners. So the automakers need their big luxury cars, which are high on profitability, to sell well.

And this is where Volkswagen scores over GM. The Audi, which is in fact the biggest driver of Volkswagen’s profit worldwide, enjoys great popularity in China, while GM continues to struggle with Cadillac. Volkswagen sells around 35,000 Audis a month in China, which ensures that there are enough profits for the company even after the shares of joint venture partners.

What will boost GM’s profits?

The company is working on revamping around 70% of its lineup over the next couple of years, and this should be a key driver for future profits. GM is planning to launch its new range of pickups this spring, and we will be keeping an eye on this. GM sells almost a similar number of pickups as Ford, and if it can come out with good vehicles that gain popularity, the company would definitely be able to save on the incentives and see some margin gains. Besides, now that Ford has shown the way, it is about time that GM formulates a global strategy to rationalize capacity and operate with a leaner cost structure.

In Europe, GM is working on actively restructuring its operations. The company has announced that it will be closing one factory of its long struggling Opel unit. It has also recently hired Volkswagen’s Karl-Thomas Neumann as president of GM Europe and CEO of Opel, to turn things around. GM is planning to return to profitability in Europe by 2015. The company’s Opel/Vauxhall cars rank third in terms of popularity, trailing behind Volkswagen and Ford as computed by the number of units sold by these brands in 2012.

The other area of focus would be to make a comeback in the luxury segment with Cadillac, particularly in China. GM plans to boost its sales there to US levels by 2015, and is working towards this. It is planning to launch a more upscale version of the midsized CTS sedan, and is gaining popularity for its small size ATS sedan.

Will the CEO’s dream come true?

GM is a solid company and deserves a better valuation. So upside is definitely there.  If the company is able to come out with a winning lineup over the next couple of years, and rationalize costs, there is no reason why margins should not increase. However, the company has to first execute its upcoming launches, gain pricing power, and cut losses in Europe before it can expect to achieve the lofty target that the CEO has set. While it sure is a good target to work towards, it looks like GM still has miles to go before becoming the most valuable auto company.

tinade has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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