Why I'm Buying General Motors Company

Why I'm Buying General Motors Company

When General Motorsreported earnings last week that were well below analyst estimates, it seemed like the only thing holding the stock up from an even steeper fall was how low investor expectations were in the first place: The company's forward earnings were already valued well below the market average, indicating a general lack of faith in the company's ability to deliver. It's fair to say that since its emergence from bankruptcy, General Motors (or Government Motors, as some dubbed it) has been a pretty unloved name. Yet today the company looks healthier than ever, and despite lingering problems, the stock is selling for a deep discount that looks attractive enough for me to buy.

It's no wonder the company has faced criticism. Even before its bankruptcy, it had acquired a reputation for complacency, bloated costs, stale design, and an out-of-touch style of management epitomized by former CEO Richard Wagoner taking a private jet to Washington to plead for a bailout. Receiving that bailout, and enduring years of direct government stock ownership, hardly burnished its image.

Today, two of the biggest challenges that contributed to GM's bankruptcy continue to overhang its performance. It still has underfunded global pension liabilities of nearly $20 billion. While GM's total pension obligations are about 80% funded, my Foolish colleague Daniel Miller noted recently that GM's progress in reducing these liabilities lags both close rival Ford and the U.S. corporate average. In its earnings report last week, the company indicated it still didn't see this as a pressing issue, noting it had no plans to contribute to its pension plans in 2014.

Neither has General Motors solved its ongoing problems in Europe, where it has lost nearly $20 billion over the past 15 years. Losses came in at a relatively light $800 million in 2013, but with a stagnant auto sales environment in Europe, GM Europe will only meet its goal of breaking even by 2015 by aggressively cutting costs and reducing its footprint in the region.

Not your father's GM
Despite all that, General Motors simply isn't the same company that failed so catastrophically during the recession. Bankruptcy gave General Motors the opportunity not only to install forward-thinking, new management but to dramatically reduce its bloated cost structure and refocus on creating good products. In 2008, General Motors needed to sell around 4 million vehicles to break even, and its product mix was heavily reliant on SUVs and trucks for profitability, with light vehicles coming in as something of an afterthought. Aggressively confronting manufacturing and legacy labor costs has lowered that breakeven point by half, to around 2 million vehicles, leaving GM's North American unit financially healthy even at the low point of a sales cycle.

Besides simply cutting costs, General Motors has bent itself to the task of making cars people really want to buy. The new Chevy Impala was named Consumer Reports' best sedan, and the Corvette Stingray and Chevy Silverado were named the North American car and truck of the year, respectively, at the Detroit 2014 auto show.

Beyond awards and accolades, however, GM's progress can be seen in the pricing discipline it has exercised in selling its vehicles. Since its emergence from bankruptcy, GM has been able to win sales of its newer vehicles without relying on the discounts and cheap financing it used to win sales against competitors' superior products in the pre-recession era. That has allowed GM to command the highest average transaction price of any of the big eight North American automakers, and supported high North American profit margins around 8%.

Why now?
2014 looks to be an excellent year for the company. GM and several analysts have predicted total U.S. automobile sales of 16 million-16.5 million, which would mark the best year since 2007 while remaining well under the historic high of nearly 18 million. With market share around 18%, its North America unit should be spinning plenty of cash to address problems elsewhere and execute on opportunities to enhance shareholder value. GM has already taken one of the most shareholder-friendly actions a company can take: It has instituted a dividend payment, currently yielding a very tempting 3.4%.

Most importantly, in light of the progress it has made and the catalysts ahead of it, GM stock just looks cheap. Concerns about Europe, pension liabilities, and discounting seem to be built into the stock price, with forward earnings valued at less than half the market average. GM is still navigating its transformation, but has already done enough to demonstrate that it is both willing and able to tackle major challenges.

With a more profitable product line that it has seen in years or decades and a North American market that is still harboring significant pent-up demand, I'm buying in before the market values this reinvigorated business for what it's worth.

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The article Why I'm Buying General Motors Company originally appeared on Fool.com.

Daniel Ferry owns shares of Ford and General Motors and has the following options: Long January 2016 $15 calls on Ford, short January 2015 $15 puts on Ford, short January 2015 $12 puts on Ford. The Motley Fool recommends General Motors. It recommends and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published