In 2009, the prospects looked bleak for General Motors (NYSE:GM) as the company filed for bankruptcy. Most people wondered whether GM — even with a $50 billion bailout — could really get competitive again.
Well, so far, GM is doing everything it can to prove the doomsayers wrong. In General Motors’ most recent earnings report, the company posted a 62% increase in full-year profits to an all-time high of $7.6 billion. GM shares spiked 9% to $27 — still below its November 2010 IPO price of $33 per share, but still an encouraging move.
But can investors expected even more returns in the future? Here’s a look at the pros and cons of General Motor stock:
Quality: This traditionally has been a marketing message for General Motors, but not something that was taken with much urgency. However, this has changed in the past few years. GM’s improved products are helping the company gain more market share, and the company has even been able to raise prices, which contributed to $500 million in earnings for the quarter. GM also is getting lots of traction in China, where it has a 13.6% market share and has sold more than 2 million vehicles annually in the past two years.
Fortress Balance Sheet: Bankruptcy definitely seems unlikely now. Consider that the company has about $37.5 billion in liquid assets.
Cost Cutting: General Motors realizes it still has a bloated infrastructure, so the company remains focused on finding savings. For example, GM has terminated the pension contributions for 19,000 U.S. salaried workers. The company also will give its salaried employees lower bonuses for 2011 and freeze pay for 2012.
Europe and Latin America: Both regions continue to face challenges. Europe has suffered a general slowdown amid its countries’ ongoing debt problems, and in the prior quarter, GM posted a loss of $562 million in the area. However, there is buzz that the company might put together a comprehensive alliance with Peugeot, which is the No. 2 automaker in Europe. Such a move could help reduce capacity and costs. GM also lagged in South America, posting a $225 million quarterly loss in the region.
Pension Obligations: While General Motors is making progress on this front, it remains a risk. The company still has a $24.5 billion shortfall on its pension plans, and its more conservative pension investments could lag on returns.
Competition: Because of disasters like the Japan earthquake and tsunami and flooding in Thailand, rivals like Toyota (NYSE:TM) and Honda (NYSE:HMC) had cutbacks in production. However, both are getting back on track. And GM also has to deal with the improving domestic prospects of Ford (NYSE:F) and Chrysler, as well as global powerhouse Volkswagen (PINK:VLKAY).
General Motors certainly still has a pile of laundry to tend to, but the company says it will continue to find ways to turn things around, such as finding lower costs and putting out better products.
GM also is benefiting nicely in North America. For example, it looks like the region could see a 10% increase in car sales to about 14 million for 2012. And growth should continue during the next few years as Americans catch up on purchases held off during the financial crisis and subsequent recession. GM also has long-term growth prospects in markets like China and Russia.
All in all, General Motors’ pros outweigh the cons for now.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook, All About Short Selling and All About Commodities. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.