General Motors (NYSE:GM) and PSA Peugeot Citroen (PINK:PEUGY) reportedly are pondering a manufacturing alliance. The move by the two automakers is no doubt an effort to staunch the bleeding of their respective losses in Europe, which thanks to the region’s fiscal woes have been a nail in both companies’ tires. The move also is likely an attempt to lower production costs for both parties.
If you’re GM, a deal with the “Lion” would provide a way to reduce operating costs at its European unit, Opel. If you’re Peugeot, an alliance would provide access to GM’s international market reach. That’s big for Peugeot, as its current target market is the aforementioned weak milieu that is Europe.
Although neither company officially has confirmed that they are in deal talks, insiders familiar with the situation expect announcements from both companies on their plans to share vehicle models and the parts that go into them. According to analysts at Morgan Stanley (NYSE:MS), a GM-Peugeot alliance eventually could lead to a cost savings of between $2 billion and $3 billion via pooling together vehicle development resources and sharing complementary platforms. Considering GM Europe lost $700 million last year, the cost savings here could be a big help to the automaker’s bottom line.
For Peugeot, whose shares rose 20% on word of a possible GM deal, it wouldn’t be their first alliance. The French company already has various deals with BMW, Ford (NYSE:F), Mitsubishi Motors and Toyota (NYSE:TM).
Of course, the key question for investors here is whether a Peugeot deal will help the shares of GM going forward. After all, every American wants to recoup their investment in GM, so does this deal help put the automaker’s share price back on track?
Click to Enlarge In my judgment, GM shares already are in the driver’s seat. The company is poised to capture a big chunk of what’s expected to be another banner year for auto sales. Last year, the industry sold about 12.8 million vehicles in the U.S. alone. Edmunds.com is forecasting 2012 sales of 13.6 million, while fellow industry watchers TrueCar.com expect slightly higher sales of 13.8 million.
Another big driver for GM (and the industry at large) is that the average age of a car on the road in the U.S. now is approaching 11 years. That means consumers will need to replace those old models with newer models. And with interest rates at rock-bottom levels, getting a new car loan is cheaper than it has been in years.
The only problem for investors here with GM is that there is a lot of overhead supply in the stock at about $33. That could keep a lid on things for traders; however, at $26.70 a share (as of Feb. 24), that still means there is a lot of upside. If you’re a trader rather than an investor, getting in this stock now could be a very nice ride.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.