Should I Buy General Motors? 3 Pros, 3 Cons

by Tom Taulli | May 8, 2013 9:09 am

Should I Buy General Motors? 3 Pros, 3 Cons

Back in November 2010, General Motors (NYSE:GM[1]) pulled off one of history’s largest IPOs, raising about $20.1 billion in the deal — primarily so it could help pay back $50 billion in bailout funds from the federal government.

The deal wasn’t so good for investors off the bat, who saw shares dip from $34 to $20 in less than a year … though GM has been getting its groove back, having improved by nearly 70% since August 2012.

So, should you buy General Motors hoping to ride the American automaker’s continually improving fortunes, or has the stock finally run out of juice? To decide, let’s look at the pros and cons.

Pros

Products: GM has invested heavily in its product development — and it has been paying off. Cars like the Chevrolet Silverado and GMC Sierra have been major hits for the company, which plans to launch about 20 vehicles during the rest of the year. So it should be no surprise that GM has been posting strong results, including a year-over-year improvement of 9.3% in first-quarter U.S. vehicle sales. GM also has been pushing innovation, such as one of its most anticipated initiatives — the rollout of 4G LTE in all brands in the U.S. and Canada by 2014.

Auto Sales: The U.S. market is making a nice comeback thanks to rock-bottom interest rates and an aging consumer fleet. According to GM’s own projections, total sales for 2012 are likely to range from 15 million to 15.5 million, which is close to the normal pre-recession levels. China represents another big opportunity, where GM’s 15.2% market share positions the company nicely. GM plans to invest $11 billion in the country between 2013 to 2016 to boost capacity by 30%, up to 5 million vehicles. The total sales in the Chinese market last year came to 15.5 million, up 7%.

Financials: GM has $24.3 billion in cash and $11 billion in available credit facilities. More importantly, the company’s cost structure is much leaner than it has been in the past. The fixed costs have gone done about 25% since 2007 to about $21 billion, potentially giving GM the wherewithal to survive a recession.

Cons

Competition: The auto industry is working through significant changes, which is sparking innovation. One merely needs to look at Tesla Motors (NASDAQ:TSLA[2]), which is revolutionizing the concept of a car. Thus, to remain competitive, old-line automakers will need to become more tech savvy, which will involve the notoriously difficult process of attracting top-notch engineers. Also, Toyota (NYSE:TM[3]) and Honda (NYSE:HMC[4]) have recovered nicely from the Fukashima disaster in Japan, with the latter reclaiming its top global sales spot.

Europe: GM is making progress in this market. In the latest quarter, adjusted EBITDA came to -$175 million, an improvement from -$294 million in the same period a year ago. In comparison, Ford (NYSE:F[5]) lost about $462 million during the same period. However, much of GM’s progress in Europe has come from cost-cutting — revenue growth has been and likely will remain sparse amid the region’s stagnation.

Labor: GM has had mostly harmonious labor relations, but this could change in Europe as the company becomes more aggressive with layoffs. Meanwhile, the pension is underfunded by a $26.3 billion, which should be a drag on earnings for the upcoming years.

Verdict

Edward Whitacre recently wrote a book titled American Turnaround that recounted his stint as the CEO of General Motors, which came after the bailout. It was a scary story, given how easily the company could have failed again.

But Whitacre and his team were able to get things back on track, and now GM has become a great success story. The company’s cost structure is much more reasonable, and the product line looks impressive.

While there are headwinds from Europe, GM is likely to continue with its momentum in North America and China. Plus, it’s attractive from a valuation standpoint right now, trading at a mere 7 times next year’s earnings.

So should you buy GM? Yes — for now, the pros outweigh the cons.

Tom Taulli runs the InvestorPlace blog IPO Playbook[6]. He is also the author of High-Profit IPO Strategies[7]All About Commodities[8] and All About Short Selling[9]. Follow him on Twitter at @ttaulli[10]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  2. TSLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSLA
  3. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM
  4. HMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HMC
  5. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  6. IPO Playbook: http://investorplace.com/ipo-playbook/
  7. High-Profit IPO Strategies: http://goo.gl/TXQsz
  8. All About Commodities: http://goo.gl/FfP8R
  9. All About Short Selling: http://goo.gl/t5Jzb
  10. @ttaulli: https://twitter.com/ttaulli

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