Why Is Buffett Buying General Motors Company (GM)?

Improvements at home are already in motion
Despite posting three profitable years in a row since its emergence from bankruptcy, GM is still very much a turnaround work in progress. It still has some catching up to do before it can match Ford Motor Company (NYSE:F) or Toyota Motor Corporation (ADR) (NYSE:TM)‘s end-to-end product quality here in the U.S. — or for that matter, Ford’s profit margins here.

But what isn’t visible to casual observers is that the work needed to narrow that gap is already happening. For the past three years, GM has been working on a full-on product overhaul that is just now hitting its stride. Products like the Chevy Cruze and Sonic small cars, and last year’s Cadillac ATS sedan, have proven that GM can design and build vehicles that really do compete well with the world’s best.

Over the next couple of years, GM will go from having North America’s oldest product lineup to its newest, as a slew of all-new cars and trucks hit its dealers. If they’re competitive – and GM’s recent track record inspires some confidence – those new products should improve GM’s average transaction prices, driving fatter margins.

The upshot: A lot of upside for GM
The case for GM isn’t quite as much of a slam-dunk as the case for Ford. Ford’s North American operation is already robustly healthy, and the Blue Oval’s proven management team is taking the same approach to restructuring its European operation, which has problems (and losses) similar to GM’s.

GM still has more challenges at home than Ford does, and unlike Ford, its management team doesn’t already have one impressive turnaround under its belt. But given GM’s still-impressive global scale, the potential upside may be considerably higher. It’s not hard to understand why Team Buffett chose to jump in.

The article Why Is Buffett Buying GM? originally appeared on Fool.com and is written by John Rosevear.

Fool contributor John Rosevear owns shares of General Motors and Ford. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors.

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