| 0 Comments
Jacob is a member of The Motley Fool Blog Network — entries represent the personal opinions of our bloggers and are not formally edited.
General Motors (NYSE: GM) designs, manufactures, and markets cars, crossovers, trucks, and automobile parts globally. The company sells its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Opel, Daewoo, Holden, and Vauxhall brand names, as well as under the Alpheon, Jiefang, Baojun, and Wuling brand names.
GM, though still bearing the brunt of some earlier decisions which drove it to bankruptcy, has come out stronger and better. The company seems to be more focused and ready to face challenges. Investors need to be cautious with GM in the short term (3-6 months), as earnings estimates and the stock itself may need to first move lower before embarking on the long-term, product cycle driven advance.
Competitor Slightly Ahead
Though General Motors is making an effort to offer a global line of vehicles, particularly when it comes to Chevrolet and Cadillac, the company is still suffering from massive, tech based overlap, which causes huge inefficiencies and unnecessary complexity. To overcome this, GM is working hard to decrease the number of platforms and engines by 2018, while its most recent vehicles are of the global nature (Sonic/Aveo, Cruze, Malibu). Sadly that doesn’t pertain to the entire lineup quite yet, as the Equinox, Traverse, Orlando, and Trax are not truly global products. General Motors is yet to make efforts to decrease complexity and increase efficiency by reducing platforms and power trains.
Slim International Profits
General Motors is highly successful and profitable in North America, but this is not the case worldwide. The automaker has been losing money in Europe for the past few years. The uninspiring performance has been a cause of concern, though the losses are mainly due to lower demand and price competition triggered by a weak European economy. The company is taking measures to restructure its European operations, but it will not deliver any result until 2015.
GM is the market leader in China, thanks to the popularity of Buick and Chevrolet. GM’s joint venture partner in China contributes half of the sales volume in China, but the relationship doesn’t really do any good for the bottom line, because profits on the cheap Wuling Vans and trucks are less even before Wuling takes its joint venture cut. VW is catching up to China in overall sales volume while outperforming GM when it comes to profits.
The automaker recently announced a 200 million share buyback plan. Even considering the buyback, GM’s balance sheet continues to remain strong, with pro forma excess cash of $17.5 billion. With the strong liquidity and cash balance, GM still has the balance sheet flexibility, which it can use toward pensions, Europe restructuring, acquisitions, or potentially on further buybacks.
Another positive for the company is the sale of the U.S. Government’s stake. This will provide a modest mid-term boost to GM, as potential customers (perhaps importantly for pickups) who may have been alienated by government involvement will now have a clearer path to purchase a GM vehicle.
As per a report from Barclays, GM, which was ineligible for addition to the SP 500 up until now due to the fact that it is just short of the required minimum 50% float, is a leading candidate to be included in the index whenever an opportunity for inclusion arises.
General Motors is undergoing a major transformation. Led by Akerson, the automaker is taking major steps to decrease complexity, bring international operations into the black, and make a world-class luxury brand out of Cadillac. All of these initiatives should accumulate GM billions of dollars, while ensuring better products that are more popular and carry higher margins. The new and more promising product portfolio of the automaker will enhance its pricing power and reduce dependence on discounts. However, the improvements are of the long-term nature, with international programs likely to take years (at least until 2015), while Cadillac may take even a few more years to come into action.
What’s conceivably most imperative is for General Motors to keep on getting the product right. However, once GM completes its platform and power plant consolidation and builds a proper IT department that can help the company with real decision making power, all the other things will fall into place. There is a potential near term risk, but the long term opportunity in the stock cannot be denied.