I am an ardent fan of Greek mythology, as well as of the long-living Phoenix, which displays a very unique feature of being born out of the ashes of its predecessor. This bird is obviously a myth, but General Motors (NYSE:GM) has achieved a similar feat in the real world. After filing for bankruptcy in 2009 and being funded by the government, the company has come a long way to become a leading automaker across the globe.
Improving Economy in the U.S.
Auto sales in the U.S. have been on the rise since the beginning of 2013 as the economy gets back on a growth track. Consumer spending is constantly improving in the country, leading to higher demand for big-ticket items. According to the data, May was the best overall sales month for GM since the meltdown in 2008. GM’s first quarter results were almost flat, with net income at $0.9 billion compared to $1 billion in the previous quarter. The rising recession in Europe is still hurting the revenues of the global automakers, with car sales going down every month.
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- GM 15-Year Financial Data
- The intrinsic value of GM
- Peter Lynch Chart of GM
Cash Position Needs Improvement
While the company's financial results were pretty much flat, cash flow for the quarter appeared to be an area of some worry. Automotive net cash was $500 billion in the quarter, a decrease of $1.8 billion from the same period last year, whereas the automotive free cash flow was a negative $1.3 billion. The management attributed this cash flow anomaly to a production timing issue that generally persists in the first quarter. Also, an increase in capital expenditure and a slight decline in the revenue adversely affected free cash flow. I believe this will reverse in the remaining half of the year as auto sales improve globally. On top of that, there will not be timing issues related to production, which will ease the pressure on cash flows.
Cadillac as a brand is crucial to GM at this stage. In the first quarter, Cadillac’s sales increased 38% year-over-year in the U.S. A major portion of GM’s revenue has been coming from the sale of trucks and SUVs across the globe, which has prompted CEO Dan Akerson to revive Cadillac as a luxury brand. GM currently does not have a defined collection of cars in the luxury segment like say, Volkswagen’s Audi or BMW’s 7 series, and as a result of which it lags behind its competitors in terms of profits (since luxury cars are high-margin products).
Running for the Premium Segment
In order to narrow down this gap GM has launched a range of new Cadillac sedans, which include a compact ATS, a full-sized luxurious XTS, and a more sophisticated version of the ATS called the CTS. GM’s aim is to position Cadillac as a premium brand in major markets like North America and China, which are huge markets for status cars. China is a big battleground for the automakers because of a robust economy and reasonable consumer spending. Ford (NYSE:F), a major rival to GM, increased its sales by 45% in the month of May with the Focus being its top-selling car.
Competition Is Fierce
Luxury cars are high-margin products because of a huge price-cost gap that results from economies of scale in the production of certain components. As such, automakers are jostling to command this space. Ford is now spending more than $1 billion in order to revive its premium Lincoln brand and enter the market. The company has maintained its guidance in markets like North and South America after good first quarter results. Europe will continue to remain a challenging market for the company, which expects a loss of $2 billion in the region. It has a price-to-earnings ratio for the trailing twelve months of around 10, which is slightly lower than the industry average of around 12. In my opinion, it is a good investment option considering its consistent sales growth and the improving global economy (with the exception of Europe).
Toyota’s (NYSE:TM) shares are currently trading around $120, though with a price-to-earnings ratio of approximately 17 it is quite expensive compared to its peers. For the 2013 fiscal year, Toyota delivered strong results owing to robust recovery and the improving global economy. On a consolidated basis, net revenues totaled 22 trillion yen, slightly higher than its guidance of 21.8 trillion yen. Vehicle sales increased 1.519 million units to 8.871 million units. Toyota’s price/earnings-to-growth ratio is around 0.8, implying a undervaluation of the stock that should technically lead to an upside movement in the price. While the last few years have been tough for the company because of quality concerns and other issues that cropped up in 2009, it is getting back to a growth path as it registered a growth of 18.7% in the 2013 fiscal year. North America and Asia have been its best-performing markets with the presence of brands like Prius, Camry and next generation Corolla.
Product Is in Focus Now
In May 2013, GM exceeded its IPO price of $33 for the first time in two years, and investors who stayed invested saw some real gain. Company management is committed to increasing its market share across all segments and getting neck-and-neck with its competitors. It is aiming for a 10% share of luxury car market in China by 2020 with the help of its premium Cadillac brand. Apart from China, GM has also planned on launching around seven or eight new cars under its Chevrolet brand in North America.
It is quite clear that GM is now getting aggressive with regard to its products. The company has been hugely successful in executing a massive turnaround and now aims to get a major chunk of the market. In my view, this is the right time to invest in GM because it has a solid line-up of products, consistent sales growth in major markets and a dedicated management that is committed to executing planned initiatives.