GM Disappoints - Has US Auto Rally Played Out Completely?

Jacob is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Auto major General Motors (NYSE: GM) announced its fourth quarter and full year results recently and the stock reacted by declining sharply.

What prompted the fall was the 35 percent drop in its full year profits, despite an improving top line. To be sure, the drop in profits largely came on the back of losses in Europe and exceptional tax accounting changes.

According to the report, last year the auto major lost nearly $1.8 billion in Europe where indicators point to the recession staying for a considerable time. This loss offset the benefits it made in emerging nations most notable of which is China. The stock price has been making lower highs in recent months and it looks like the poor results and lack of positives for the current year have sealed this downward trend in stock price.

General Motors’s stock has lost more than 9 percent over the last 30 days.

Towards the end of January, General Motors’s chief rival Ford (NYSE: F)  reported financial figures that also left analysts underwhelmed. Ford’s quarterly revenues increased 5 per cent to $36.5 billion while the company's net income in the same period was $565 million higher than 2011. However, Ford's full year net income dropped by U$307 million and on top of it, the company issued a flat operating profit outlook for 2013. The result was an 8 percent drop in its stock price over the last month. This was despite Ford enjoying an unprecedented run in its home market.

While Europe has been undergoing a slowdown, the rest of the world has not been sleeping exactly. If sales numbers reported by Ford and GM are any indicator to go by, China is buzzing with activities and so is our own domestic market.

Why then are analysts and investors not happy with auto companies? A closer look at the data gives the perfect reason. The benefits of higher revenue elsewhere in the world are being consumed by steep declines in the Eurozone. And the losses are still increasing with no signs of European economies picking up any time soon.

General Motors's loss in the region expanded by close to $1 billion during the year. This is in contrast with Ford which lost $1.8 billion in the same period compared to approximately break even a year ago.  At the same time, the cyclical nature of the industry means that the rally in the U.S. market cannot go on forever. It is thus not difficult to see why investors are abandoning these stocks. Most automakers are global in nature, which means at any point in time, they are usually present in a troubled geography.

It is difficult to find plays solely focused on a local market, which are looking robust, at least in the short term. One such player is Tesla Motors (NASDAQ: TSLA) - the only other listed auto company that general investors can buy. However, analysts warn against doing so at current levels as the company’s products are new and as a result, are prone to technical issues.

These vehicles are based on new technology, so they are often more scrutinized by regulators and media houses. The result – even the slightest of issues with these new products garner much attention and negative media publicity. This was exemplified by a negative review of a Tesla car which allegedly turned out to be a case of human error. Similar problems with more established products in the market are easily overlooked and as such investing in such new companies is purely a function of finding attractive entry points.

As Tesla Motors is trading close to its 52 week high, the downside is quite high and looking at the recent issues with its latest electric car highlighted by some independent tests, the stock may actually be a good short candidate.


valuewalk has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors . 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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