General Motors' (
GM
) has soared recently after it announced that it would buyback 200
million shares from the government at $27.50 a share by the end of
2012. The Treasury also announced that it would sell the
remaining 300 million shares by early 2014, thereby freeing the
company from any government interference in its decision making.
GM's stock has risen more than 10% in December itself and more than
40% in the whole of 2012.
There is also a significant amount of optimism arising from the
fact that GM will introduce a total of 20 new or refreshed models
in 2013 in the U.S.; 13 of them being Chevy. However, amid the
recent exuberance, it is important not to forget the issues the
automaker still needs to address so that it can ensure that it
continues to hold onto hard fought gains since the government's
bailout.
a) No Significant Development in Europe
Given the gravity of the situation in the region, GM's
initiatives to turnaround its European operations lack
conviction. The most recent development has been its plan to
shut down its Bochum plant in Germany but that will happen not
before 2016. Auto companies suffer from significant overcapacity in
Europe but the labor unions, and the government has acted as a
major impediment in shutting down plants with overcapacity. GM
is expected to lose more than $1.5 billion in Europe in 2012, and
the company expects to become profitable in Europe only by the
mid-decade.
There have also been a couple of management changes, but unless
the automaker rolls out new, improved vehicles, it is unlikely to
become a consistently profit generating company in the long run. GM
still needs to lay out a concrete plan to improve its European
operations because the target of becoming profitable by mid-decade
looks optimistic right now.
See full analysis for Genera Motors
b) Rising Competition in China
December's sales figures are yet to be released but GM will most
probably sell more vehicles in China than it did in the U.S. in
2012. GM's and its joint ventures' sales were up 10% to 2.6 million
vehicles through November. Furthermore, GM and its joint
ventures are pouring in another $1 billion to build their
third plant in Southwest China which will raise the production
capacity by another
400,000 units
by 2015. Overall, GM is doing well in China. However, the net
income earned by vehicles has declined in 2012 which is partly
attributable to a higher proportion of lower priced models sold and
partly to greater discounts offered by the automaker.
Also, the sales in the second half of the year could have been
helped by people choosing non-Japanese brands due to the
anti-Japanese sentiment in China. With things slowly getting back
to normal and Japanese autos such as
Toyota Motors
(
TM
) and Honda Motors (
HMC
) planning to offer hefty discounts in 2013 in order to win back
customers, things will only get tougher for GM. Volkswagen too
will introduce eight new or refreshed models including the
Santana, Golf, Skoda Octavia and Audi Q3 in 2013 and plans to
overtake GM as the market leader in the country. GM holds only a
slender lead in China with sales in the first eleven months at 2.6
million vehicles compared to 2.53 million for Volkwagen. With
increasing competition, there could be a further downside to GM's
net income earned per vehicle sold.
c) Soaring Truck Inventories
The automaker's pick up truck inventory swelled to 139 days from
110 days in October. Normally, inventory levels beyond the
equivalent of 60 to 70 days is considered unhealthy. Light
trucks and SUVs make up for 60% of its North American sales and
weakening inventory levels are a worrying sign. Moreover, trucks
generally have better margins than cars so their impact on profits
are greater.
GM will also make available the recently unveiled Silverado 2014
and GMC Sierra models in its showroom soon and a rising inventory
of its existing line up could dent the launch of the redesigned
models. To reduce its stockpile, GM boosted the discounts on
its pickups in December offering up to $5,000 of incentives on
Silverados. The abnormally high incentives could then suddenly
make the newer models appear unattractive due to their relatively
higher pricing.
We have a near $27 price estimate for General Motors, which is
about 5% below the current market price.
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