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Some Reasons To Curb Your Enthusiasm For GM
1/7/2013 12:24:00 PM
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.
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.