General Motors Company (GM)’s Opportunity: An Update

While it has now been profitable for three years in a row, General Motors Company (NYSE:GM) is still a work in progress. On the one hand, GM has come a long way since the bad old days of last decade: It has minimal debt, more than $25 billion in cash, and a product line that is improving at a rapid rate.

Yet much remains to be done. General Motors Company (NYSE:GM) may be solidly profitable, but its profits are dwarfed by those of key rivals. It’s burning huge sums in Europe — almost $2 billion in 2012 alone. Its product line still lacks the end-to-end strength of its most important rivals, Ford Motor Company (NYSE:F) , Volkswagen , and Toyota Motor Corporation (ADR) (NYSE:TM).

General Motors Company (NYSE:GM)Is GM’s stock a buy, or something to avoid? Last fall, I created a premium report on GM to help investors understand if GM is likely to follow Ford and return to glory — or whether it’s destined to remain, for all of its size, an also-ran.

Following are excerpts from the latest edition of the report, updating GM’s opportunity — and a key area of concern — in 2013 and beyond. We hope you enjoy it.

General Motors Company (NYSE:GM)’s opportunity
GM has shown steady progress since its emergence from bankruptcy in 2009, with 12 consecutive profitable quarters through 2012, and a net profit of $4.9 billion last year. [CEO Dan] Akerson and his team continue to work to improve GM’s margins, and given favorable economic conditions, profits are almost certain to rise significantly in coming years.

Perhaps most importantly, GM’s product portfolio — long filled with also-rans — is improving rapidly, and the company has already reached parity with key competitors in several market segments. Recent models like the Chevrolet Cruze and Cadillac ATS compete well with Japanese, Korean, and German rivals.

General Motors Company (NYSE:GM) is still in the process of revamping its global product line, with important introductions due to arrive over the next several quarters. Those introductions include replacements for the company’s most important products, its full-sized pickups, the Chevrolet Silverado and GMC Sierra. Both were first shown in January of 2013, and production models are due at dealers before summer.

Several other new models are expected in 2013, including replacements for the important Chevrolet Impala and Cadillac CTS sedans. As those products are rolled out, GM’s sales, margins, and overall competitive standing should continue to improve.

But much work remains to be done. In August of 2011, GM senior management announced a long-range plan to streamline and simplify GM’s global product offerings, much as Ford has done with its “One Ford” plan. Under the plan, by 2018, GM will be building 90% of its vehicles — total, around the world – on just 14 “core architectures,” or platforms, down from about 30 today.

The benefits from such a consolidation will be extremely significant. Over the last few years, Ford has demonstrated that such an approach leads to better, more competitive vehicles, because with fewer core architectures, more resources can be devoted to the development of each. This in turn leads to both better economies of scale and the ability to increase asking prices, both of which will improve margins. That leaves more money to develop the next generation of vehicles, and so on: a virtuous circle.

This is exactly the medicine that GM has needed for a long time. GM has long been at a disadvantage to its principal global rivals when it comes to product quality, making up the difference with good marketing and its vast scale and reach. Improving GM’s products and further reducing its costs, while preserving its traditional strengths, should make GM a formidable global contender over the long term.

That is the basis of the opportunity: The chance to buy a solidly profitable GM at a discount now, knowing that significant further improvements to its business — in the U.S. and overseas — are likely in coming years.

One area you must watch: Europe
Like most automakers doing business in the region, GM has been posting significant losses on its European operations — over $17 billion since 1999, $1.8 billion in 2012 alone. The industry’s problem is structural: Too many auto factories, not enough auto sales. This mismatch has been exacerbated by difficult economic conditions in many European nations, which have put significant downward pressure on new car sales. That in turn has led many automakers to discount heavily, eroding margins.

GM’s European subsidiary, Opel, has been seriously ill for a long time. In many ways, Opel’s problems have resembled those of pre-bankruptcy GM: too much production capacity, too-rich deals with labor unions, and eroding market share.

Reducing fixed costs by closing factories would do much to improve Opel’s prospects, just as capacity reductions were key in turning around GM’s North American operation. But labor-friendly rules in Western European countries such as Germany and France limit GM’s ability to close plants. A solution that involves closing one or more factories could take several years to implement, with GM accruing significant losses in the interim.

While one factory closing has been announced, GM’s management has begun work on a multi-pronged approach to restoring its European operation to health. In the last year, Opel’s senior management has been overhauled (with new Opel CEO Karl-Thomas Neumann set to take charge in March), a cost-saving strategic alliance with French automaker PSA Peugeot Citroen has been created, and a slew of new (and new-to-Europe) models are on the way.

GM’s current guidance, reiterated by Akerson in February 2013, is that GM Europe is now on course to break even on a pre-tax basis by “mid-decade”. That said, the company won’t rule out further (and more drastic) moves, and this is a situation that shareholders should watch very closely.

The article General Motors’ Opportunity: An Update originally appeared on Fool.com.

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