A Few Reasons to Invest in General Motors For the Long Run
General Motors (GM) is finally providing relief to its shareholders. Although the defective ignition switches that have been linked to at least 13 deaths can’t be ignored, GM has learned from its mistakes and emerged as New GM, which now provides a high level of safety, compelling value, outstanding quality, and world-class customer services while aggressively addressing underlying business opportunities it has ahead.
The recent results for the first-quarter 2014 were quite better than expected; General Motors posted net sales of $ 37.4 billion, an increase of approximately 2% year over year, while its net income slipped nearly 86% to $ 125 million as compared to $ 865 million year over year since the company had to pay nearly $ 1.3 billion to cover the cost for a major product recall.
Nevertheless, General Motors has left this aside and is focused to tap the opportunities that lie ahead as it expects modest industry growth in 2014, driven by U.S., Chinese, and European markets. It plans to introduce key vehicle models in varieties of highly recognized makes such as Chevrolet Silverado HD, Trax Crossover, Tahoe, Suburban, Colorado, Aveo and Sail; Cadillac ATS Coupe, CTS and Escalade; GMC Sierra HD, Yukon XL, Denali XL and Canyon in these regions which are gaining enough traction in the market and growing at a healthy pace.
Investments for the future
General Motors is focused to make necessary investment to restructure its business, benefitting from these regions that should increase its overall profitability going forward. Additionally, General Motors has refinanced about $ 4.5 billion in high-cost debt that should increase its financial flexibility going forward. It also completed the acquisition of substantially all of Ally Financial’s International operation that should help the company to increase sales for its products with reduced costs involved in third-party finances and documentations.
Meanwhile, its performance has been excellent in the U.S and China. It had launched nearly 18 vehicles in 2013 in the U.S. that drove its sales to a great extent; it now plans to launch about 15 new upgraded models in the U.S market this year, as GM still remains one of the best choice in the region despite its various safety issues confronted with the makes.
The auto giant is expected to benefit in a big way as the average transaction prices for its full size pick-up ATPs has increased by 5,000 year-over-year.
Venturing into new markets
On the other side, General Motors has built solid partnerships with joint ventures in China to introduce 17 new and upgraded models in FY 2014. In addition, the company is planning to open an additional plant in China, which is expected to be completed by the first half of 2015 and will increase its production capacity up to 5 million units annually.
It has also experienced strong demand for its Cadillac brand that is dominating the sedan sales with its ongoing success of the Buick and Wuling in China. General Motors has gained one tenth of a point of the market share in China in the reported quarter, and is expected to gain high single-digit growth in the region in the second half of the year.
Strategic moves such as these should help the company to make up for the huge cost of $ 1.3 billion it incurred for product recall. It plans to infuse an investment of nearly $ 12 billion in the country from 2014 to 2017, as China is currently the largest and fastest growing market for automobiles in the world. The Chinese automobile market experienced a robust compounded average growth rate of nearly 11% last year. It has witnessed strong sales of 1.85 million units during the first quarter of 2014 and is expected to grow even faster than this for the rest of 2014.
Apart from this, the company has witnessed comparatively good progress in Europe after General Motors spent about $ 200 million in restructuring costs during the first quarter of 2014. Though the net loss in Europe has widened for the automobile giant to $ 284 million from $ 152 million in the corresponding period last year, it expects to touch the break-even point later this year. General Motors was pleased with its Opel Vauxhall brand that dominated the European market as it witnessed about 9% yearly growth and is still driving its sales in the region.
Additionally, General Motors is now able to trace its market position directly to Opel Mokka and its new Insignia flagship. The automobile giant witnessed tremendous improvement in its orders for Opel Mokka that exceeded 215,000 units since its introduction in 2012; meanwhile Insignia was also on the ramp, registering 85,000 units since its launch in 2013. These brands are expected to do even better and should increase its profitability in the region.
The net sales for General Motors in Europe increased to 9% during the quarter. The company was encouraged by the positive sentiments of customers, which is continuously increasing while economic growth in U.K and Europe region is getting stabilized. This should further help to unleash a lot of opportunity for the company to increase its market share in Europe.
It’s worth mentioning here that its North America operation is on plan, and the early results are indicating favorable signs for the company in the region due to its recently launched products that have been well received in the market. Further, GM is expected to ramp up production for its light vehicle in the range of 15.5 to 16 million units this year in the region that should certainly lift up its dipping net profit and increase its market globally.
General Motors currently trades at the trailing P/E of 18.97 and forward P/E of 7.48 indicates that the stock has been traded relatively at low price and shares cheap valuation. Its PEG ratio under one for the next five years stands at 0.53 reflects tremendous growth opportunity for the company going forward. Its profit and operating margin floats at 2.81% and 3.30% respectively but it will certainly rise back as the company has now dealt with most of its recalls and looks strong to aggressively promote its product in the market.
Its total debt remains at $ 37.77 billion which is well-mixed by most measures while its operating cash flow and leverage free cash flow stands at $ 13.79 billion and $ 2.11 billion respectively. Analysts have estimated compounded average growth rate of 21.93% as against industry growth rate of -3.20 % for the next five years speaks a lot about its prospects.