CEO Dan Ackerman is hopeful that General Motors Company (NYSE:GM) should be able to rejoin the S&P 500 index before too long. And his optimism is not unfounded. The company has come a long way since the time it filed for bankruptcy in 2009 and was unceremoniously dumped from the S&P index.
Now it’s a new GM that seems to be bolstering investor confidence like never before. Share price is hovering around its IPO price of $33 and the stock has received the attention of investment gurus like Warren Buffett and David Einhorn. So the going is good for sure. Let us take a closer look at the company to figure out what merits this optimism.
Strong demand in US
GM has sold around 902,609 cars and trucks in the US in the first four months of the year which is about 10% higher than the year ago level. The company also gained market share during this period.
The company’s Cadillac brand was the fastest growing brand in the US during the first quarter and the sales run continued in April. During April, Cadillac sales were up 37% y-o-y, while Buick sales grew 23%. In the pickup segment, Silverado sales were up 28%.
The US auto industry is well on its road to recovery. If at all there were any concerns regarding possibility of any weakness in May sales, the same has been alleviated. The auto dealers had improved sales which peaked during the long Memorial Day weekend.
Industry researcher LMC automotive predicts that seasonally adjusted annualized rate (SAAR) of light vehicles in the US will be around 15.2 million units in May. Analysts estimate that the US industry breaks even at a SAAR of 10 million units.
To further capitalize on this strong demand GM is presently going through a complete makeover phase. The company intends to revamp 90% of its vehicles by 2016. In 2013 it will launch 23 new models including the all important Silverado and Sierra pickup trucks. The company is planning to invest around $16 billion in the US through 2016.
Narrowing losses in Europe
GM is getting closer to its target of breaking even in Europe by 2015. In the first quarter the company significantly reduced its European losses to $175 million. This was primarily attributable to the $200 million cost savings in engineering and other fixed costs and a $100 million saving in depreciation.
The company has been putting all its efforts in restructuring the struggling European operations for it has already lost an astronomical $18 billion in the continent since 1999. It has taken difficult decisions like closing its plant in Bochum in Germany and freezing wages at other plants. GM is looking at cost savings of $500 million over the next three years.
Meanwhile, the company is hoping to spur demand by rolling out new models. It will launch 23 new models and 13 new engines by 2016, investing around $5.24 billion.
China is poised for growth
In China, GM was the top vehicle seller in 2012, selling around 2.84 million vehicles. The strong sales trends have continued well into 2013. In April GM’s sales were up by 15% y-o-y to 261,870 vehicles.
China is already the company’s second largest market and it intends to further increase its presence in the region. GM will be investing $11 billion in the nation by 2016 and boost its production capacity by 30% to about 5 million units.
The company will add 400 sales outlets this year and aims to have a total of 5,100 outlets by 2015. It will introduce 17 new models in China this year. SUVs will be a focus area and GM is looking at bringing in 9 new or refreshed SUVs in the country over the next 5 years.
It is also significant that the company is building a Cadillac plant in China with a production capacity of 150,000 units. Despite its solid sales General Motors Company (NYSE:GM) has not made a lot of money in China as its popular small cars and minivans are low on margins. Moreover the profits get split with the joint venture partners. So the company has been trying to get into the luxury car segment where margins are high and there is good money left even after paying the joint venture partners.
Key Challengers
It goes without saying that General Motors Company (NYSE:GM) is planning to take the world by storm introducing new models and dominate its key markets. It’s time to take a look at the competitive pressures that the company will be feeling.
GM’s cross-town rival Ford Motor Company (NYSE:F) is also on a tremendous growth trajectory. It is outperforming in the key US market. The company grew its sales by 13% in the first four months of the year compared to GM’s 10% and Chrysler’s 8.5%. Ford is enjoying excellent demand for its cars and running its plants at almost 114% capacity.
However, in Europe Ford Motor Company (NYSE:F) lags General Motors Company (NYSE:GM) in restructuring. It posted a loss of $462 million in the first quarter. Like GM it is also trying to get back in the black by mid-decade. In China Ford has a much smaller presence than GM. According to LMC Automotive, GM has around 15.6% market share while Ford Motor Company (NYSE:F) has 3%. The latter is planning to increase its presence in China and garner 6% market share by 2015.
Meanwhile, General Motors Company (NYSE:GM)’s Japanese rival Toyota Motor Corporation (ADR) (NYSE:TM) is growing its earnings solidly riding on the Japanese government’s currency devaluation strategy. In fiscal 2013 the company earned around $10.22 billion on revenue of $234.33 billion.
However, things are not going too well for Toyota Motor Corporation (ADR) (NYSE:TM) in the US and China. In the US it is suffering from falling demand of its core vehicles like Camry and Prius. In April sales were lower by 1.1% y-o-y. In China April sales were down by an even higher margin of 6.5% y-o-y. Demand is suffering on account of political territorial disputes between China and Japan which has led to people boycotting Japanese products including automobiles.
Last word
Things are looking brighter for GM. It has just turned in its thirteenth consecutive profitable quarter. The company is gaining grounds in key US and China markets and approaching breakeven in Europe. There is a lot of anticipation among in the industry over the upcoming launches. All this make a solid bullish case for General Motors Company (NYSE:GM).
Gaurav Basu has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford Motor Company (NYSE:F).
The article Why Should You Be Bullish on GM? originally appeared on Fool.com.
Gaurav is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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