Can General Motors Come Out of Its Slump?

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Oct 27, 2014

General Motors (GM, Financial) recently published its results for the second quarter, which were disappointing due to a weak performance in markets such as Russia and Venezuela. The company further suffered a decline in profit due to the recalls and faulty ignition switches. This also led to a stock price drop as investors were not encouraged by the results. However, GM’s CEO Mary Barra expects an improvement in GM’s performance in the next quarter as the company is seeing positive signs from some of its potential markets such as North America and China also, it is investing aggressively in various initiatives to shore up its operations in the market.

A closer look at the results

General Motors' quarterly profit declined by the big margin. The company posted net profit of $190 million which is way behind $1.26 billion which it posted in the same quarter last year. However, on the revenue basis, GM improved its results by more than $570 million. The earnings of the auto maker saw a steep decline due to large number of recalls. The recalls indeed chopped about $1.5 billion from GM’s bottom line.

GM is going through tough times. The company’s profit is taking a hit, and the shares are drowning due to negative marketing by the rivals and problem of the faulty ignition switches which has been a grave problem for the company even in the past. Though GM is still profitable on some grounds, there are certain areas where it has to focus to improve its performance in the future. In markets such as Russia and Venezuela, GM is still under pressure. It is taking some restructuring strategies to improve its performance in the future.

Focusing on the future

GM is striving hard to improve its profitability but nothing seems good for GM now. The company has recently launched a new family of pickup trucks which also include SUVs in the U.S. which it thought to help GM improve its position in the pickup truck market, but the cost related to defects resulted in 30 million recalls this year which blunted GM’s attempt to capture the market with its new vehicles in the American market.

It might also be a difficult thing for GM to improve it sales due to the stiff competition that it is facing from its peers such as Ford and Dodge in the pick-up truck market as well. Ford, on the other hand, is on fire with its good performance in the previous quarter, and it is also moving aggressively to make its market presence strong. In the recently reported quarter, Ford posted a good 6% rise in its profit. GM has to focus on some important growth initiatives that can help it improve its position in the market.

GM is also struggling with the quality of its vehicles. It is not a new problem, but the company has also suffered a lot in the past due to quality issues. This problem of the faulty ignition switches is turning out to be a bad PR exercise for GM. It has been reported that 13 people had been killed in GM cars due to faulty ignition switches, and this might scare a few customers away. But GM has recalled about 2.6 million small cars with faulty ignition switches. This might not prove to be enough as due to this, other competitors such as Ford might take advantage in the market as the customer’s confidence regarding GM’s vehicles take a hit.

However, GM is also taking initiatives to regain to regain its lost ground. GM has set aside $400 million to fund as a compensation for the families of those killed and people injured in the car crashes caused by the switches. GM is further expecting tax incentives from Lansing which will help GM in long run by cutting real property taxes to half for 12 years.

Conclusion

Now shifting the spotlight on fundamentals, GM is reasonable with the trailing P/E of 25.20 but the earnings are showing a downtrend with forward P/E of 6.92. But in next five years GM’s earnings are expected to show positive growth. But as of now the stock is falling so I would like to suggest that investors should withhold investment in GM until it shows some concrete signs of gaining market share.