On The Road Again

Thu Dec 04 2014
Live Index (1420 articles)

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The most important economic news of recent months has been the dramatic drop in oil prices, which accelerated over the Thanksgiving holiday break when OPEC basically began a price war with the United States and other oil producers.

Cheap oil is great news for the U.S. economy in all sorts of ways. It is good for the demand side, as consumers have more money in their pockets and bank accounts to spend on other goods and services. And it’s good for the supply side, as big companies have to spend less on shipping costs and other fuel-related matters. (For more on this, see my colleague Chad Fraser’s article “Who Wins from the Oil Price Plunge?”)

Falling oil prices are particularly good news for American automakers, as the cost of being a motorist drops and consumers are more willing to consider U.S.-produced cars (which tend to not be the most fuel-efficient in the world). Could this be enough to revive General Motors (NYSE: GM), the best-known automaker of them all?

There was a time when Americans said that “what’s good for General Motors is good for America,” but those days seem very far away. By 2009 the once-mighty GM was an economic basket case dependent on government handouts to stay in business. The company has also been hit with safety recalls and lawsuits. Could such a company really ever be a good investment again?

For all its problems, GM is still one of the top companies in the world in terms of total revenue. Its iconic brand names like Chevrolet and Cadillac have achieved a cultural resonance that most firms can only dream about. Its stock price has ranged from 27 to 42 over the last couple of years, and it is currently in the middle of that range at 34. Its price-earnings ratio is a reasonable 21.

U.S. car sales were quite strong in November, with the combination of cheap gasoline and low interest rates proving a potent combination in bringing potential buyers into the showrooms. GM reaped a healthy share of that benefit.   And the strong November was not driven by a big boost in sales incentives — incentives were down vs. the previous month — so automakers still have tools to keep sales strong.

In the month of November, GM sales jumped 6.5% to approximately 226,000 vehicles. GM’s average selling price increased by 2.3% from last month (and 9.5% from a year ago), which suggests GM did not rely on discounts to move inventory.

General Motors recently announced third quarter net income attributable to common stockholders of $ 1.4 billion, or $ 0.81 per share. A net loss from special items reduced net income by $ 0.3 billion, or 16 cents per share. The special items were primarily related to flood damage sustained at the GM Technical Center in Michigan and asset impairments in Russia.

“Strong global sales and growing margins in North America and China helped GM deliver very solid third quarter results,” said GM CEO Mary Barra. “Despite industry challenges in Russia and South America, our earnings were on plan as we continue to execute our customer-focused strategy.”

In the third quarter of 2013, GM’s net income attributable to common stockholders was $ 0.7 billion, or $ 0.45 per share.

Earnings before interest and tax (EBIT) adjusted was $ 2.3 billion and included the impact of $ 0.2 billion in restructuring costs for actions taken in GM Europe. This compares to the third quarter of 2013, when the company recorded EBIT-adjusted of $ 2.6 billion, which included $ 0.1 billion in restructuring costs.

Net revenue in the third quarter of 2014 was $ 39.3 billion, compared to $ 39.0 billion in the third quarter of 2013. In the first nine months of 2014, revenue rose to $ 116.3 billion, up from $ 114.9 billion in the same period a year ago.

One of the effects of lower oil prices is that consumers are more willing to consider automobiles that do not get the greatest gas mileage. GM tends to have quite a few vehicles in this category, such as the Cadillac Escalade and the company’s well-known line of pickup trucks. This could be one of the factors boosting recent sales numbers, as noted above.

If you do invest in GM, you should be aware that it could still be quite volatile. Some of the safety issues remain unresolved, and Wall Street still had doubts about current management. But with oil prices plunging and potential customers lining up to buy cars after several years of making do with their old ones, GM could benefit in a big way in the coming months and years.

Tom Scarlett is an investment analyst at Personal Finance.

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