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Is General Motors Set for a Rebound?
Posted by: Muhammad Bazil (IP Logged)
Date: July 27, 2012 10:34AM
General Motors (GM) was bailed out of bankruptcy by the U.S. government with about $49.5 billion in the wake of the recent economic downturn. General Motors, the global giant Detroit-based automaker, was really hurt by the economic recession of 2008. The financial fortune of General Motors was hurt badly largely because the company has a wide exposure to the euro zone financial crisis where it once had a large market for its Opel and Vauxhall auto brands. The past few years were really tough years for the U.S. automotive industry and Ford (F), another giant U.S.-based automaker and the manufacturer of Ford and Lincoln nameplates, was also not left out of the auto industry troubles, though Ford did not eventually take government bailout as GM did, but Ford received $5.9 billion government loans in 2009 to turn around its car manufacturing plants to produce cars that are more fuel efficient.
Presently, General Motors seems to be releasing some cheering news, but is the company really set for a rebound? Firstly, General Motors is largely free of its massive debt as the company has paid the U.S. government $22.3 billion out of the $49.5 billion bailout funds it received from the government. The company paid the huge sum through cash payments and stock sales. Since the U.S. government still owns 500 million shares of General Motors, it is expected that GM’s debt balance of $27.2 billion could easily be paid back. The U.S. government can sell its 500 million GM shares at about $54 per share and then recoup the outstanding bailout funds, though that is still a challenge since a GM share sells at about $19 presently.
In terms of earnings and profits, General Motors is striving to measure up. The company recorded a remarkable $7.6 billion full-year income for 2011 financial year. Though the improvement GM is making presently comes from its North America and International Operations only, General Motors is gradually posting improved sales and profits, such that it is gradually taking over from Toyota (TM) as the number one auto seller after only a year of its improved auto sales. In addition, GM has recorded $1 billion net profits in its first quarter financials, largely due to its continued good sales in North America and China.
Second, GM is presently embarking on massive transformation initiatives in its attempt to regain its past financial strength and consequently stays on top of the competition. GM is working to improve its pricing power. GM’s Chevy Cruze compact is the acclaimed brand the company is looking at to improve its earnings. Chevy Cruze compact is a highly improved brand which General Motors hopes to sell at higher prices with little incentives. If GM succeeds with Chevy Cruze, which is more than likely, the company will make more profits per sale. As part of its transformation agenda, GM is working on transforming its IT operations from 90 percent outsourced, which it has been operating before now, to 90 percent in-house operation, according to a recent report. General Motors’ IT transformation plan is expected to last for three years.
A recent research report on the most profitable car companies world over shows the industry giants in auto manufacturing and sales leading the pack. As expected, Ford, with $20.2 billion annual profits, made the list but in the second place to Volkswagen (VOW.GE) which recorded $21.5 billion annual profits. Ford deserves kudos for its rude financial survival and eventual rise in profitability. Miraculously, General Motors was rated third with annual profits at $9.2 billion, though it has returned from the land of insolvency in less than half a decade. German auto maker Daimler, with annual profits of $7.3 billion, and the South Korean auto maker Hyundai, with annual profits of $6.9 billion, were rated ahead of Honda (HMC), with annual profits of $6.4 billion, and Toyota, with annual profits of $4.9 billion, in that order.
Looking at the future prospects, I strongly believe that General Motors will do better in sales and profits in the years ahead and, therefore, I strongly recommend a buy order for prospective investors and a hold for current GM shareholders.