3 Reasons GM is a Buy Today
Is General Motors (NYS: GM) stock really a buy?
It's not a simple question, and I say that as someone who owns the stock. On the one hand, GM is a giant company that is genuinely strong -- and getting stronger -- for the first time in years,. It's on an upswing in several different ways, and already-record profits stand a good chance of growing significantly over the next several years. And at less than six times earnings, its stock is cheap.
On the other hand, the stock isn't cheap because the market has somehow overlooked the world's largest automaker. It's cheap because GM still faces some big challenges -- and those challenges should give investors pause.
Here are three reasons to take a closer look at the General's stock -- and a few caveats to consider carefully before you make the trade.
Rising profits, strong balance sheet
GM's core business -- North America -- is generating record profits. That's remarkable, all the more so because in historical terms, GM isn't selling all that many vehicles here. Not only is GM's market share a fraction of what it was in the Big Three's heyday, but the rate of auto sales in the U.S. has been well below trend ever since the start of the latest economic crisis. GM's U.S. market share is unlikely to expand significantly -- the competition is simply too fierce nowadays -- but sales are likely to pick up as consumers continue to deleverage and the economy slowly improves. As sales increase, so should GM's already-strong profits.
On a related note, GM's cash position is very strong. Bankruptcy wiped out most of Old GM's debt, and strong earnings since have left the company with a "fortress balance sheet," to use CFO Dan Ammann's term. GM had $31.6 billion in cash on hand at year's end, more than enough to keep product-development efforts going at full speed through any future downturn.
A major presence in the biggest overseas markets
GM, with its local joint-venture partners, is the market leader in China, now the world's largest auto market. And while Volkswagen (OTC: VLKAY) is close behind, no other rival is anywhere close -- a situation that isn't likely to change anytime soon. In fact, GM and its key Chinese partner, SAIC, have recently begun exporting vehicles from China to developing markets in North Africa, the Middle East, and elsewhere. As these markets continue to grow, so will GM's profits.
Big improvements are just beginning
The product-related part of Ford's (NYS: F) turnaround plan -- dubbed "One Ford" -- has been a big success for the Blue Oval. Simply put, Ford has reduced the number of models it sells around the world. Selling more of each model means that Ford makes more money (via economies of scale) and can spend more developing each (resulting in more competitive products.) Ford can also better leverage its centers of expertise -- putting its European engineers to work on small cars, for instance, and its Detroit team on trucks -- to generate the best possible products for worldwide sale.
GM CEO Dan Akerson and his team made it clear last year that the General is working on following the Ford model. By 2018, GM will build 90% of its vehicles around the world using just 14 global "core architectures," or platforms. That's down from about 30 today, some of which are used in only a single region -- just a third of GM's production currently uses global platforms.
This is significant -- done right, GM's competitiveness and margins should improve significantly. That, in turn, should drive further increases in profits over the next several years.
But not all of the General's problems have been solved -- far from it. While the company was able to make hay in the U.S. market last year thanks to production woes at Toyota (NYS: TM) and Honda (NYS: HMC) , both of those companies are already moving aggressively to reclaim lost market share. GM's product line is still a hit-or-miss affair, with vehicles that rank at or near the top of their classes sharing showroom space with some that should have been replaced years ago.
This is a problem that will solve itself in time, of course -- GM's product-development efforts are on track to make up ground lost during the company's near-death spiral, and strong new products should be in place across the board within a couple of years.
Deeper problems without simple solutions
The same can't be said about GM's long-troubled European operation, however. While Wall Street has recently been optimistic about Akerson's determination to fix the money-losing mess once and for all, the hard truth is that GM subsidiary Opel has lost over $15 billion since 1999, thanks to deeply-entrenched problems that key stakeholders are reluctant to address. I think GM Europe will eventually return to something like sustainable profitability, but only after a huge investment of time, money, and executive attention.
Finally, GM's pension situation remains a large and looming concern, and perhaps the biggest drag on the General's stock price at the moment. GM's global pensions were underfunded by over $24 billion as of year-end, a shortfall that GM might -- might -- have to make up with hefty contributions in a couple of years.
Resolving the pension situation would do wonders for GM's stock price. But at the same time, it's worth noting that GM has more than enough cash on hand to make up the shortfall - and the current situation contributes to an intriguing, if not entirely clear-cut, buying opportunity.
What do you think? Is GM a buy here? Scroll down to leave a comment and let me know.
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At the time this article was published John Rosevear owns shares of GM. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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