GM Pre-Earnings: Cruising In North America And China While Europe Sputters

by Trefis Team
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General Motors (NYSE:GM) is scheduled to announce its Q4 and full year results on February 14. The automaker’s stock had a strong run at the start of 2012 but dipped to as low as $19 over concerns about its mounting European losses. However, the stock has risen again in the last six months as it consolidates its North American and Chinese operations while carrying on with its restructuring in Europe. The U.S. government’s decision to finally sell its stake in the company at $27.50 per share also buoyed the stock price recently.

Solid On Home Turf

Overall, GM has had a solid year in North America with sales up 4% in the U.S. in 2012. It will be looking to improve its profitability though since its North American operating margins of 7.5-8% currently trail Ford’s margins of 10.5-11%. [1] Furthermore, we might see some weakness this quarter since GM was struggling with higher inventory levels and resorted to promotional incentives to clear its stockpile.

On the bright side, 2013 could see the situation turning around as the automaker plans to introduce a total of 13 new or refreshed models under the Chevrolet brand. The refreshed models, including newer versions of the Silverado and GMC Sierra could help pricing and improve margins. We will look for updates on this given the higher profitability of pickups over cars.

The Dragon Sizzles

China accounts for more than 30% of the automaker’s global sales. In fact, GM now sells more vehicles in China than it does in the U.S. In 2012, it sold 2.8 million vehicles in the country, up 11% year-on-year. [2] One of the reasons why GM is successful in China is because it has a strong portfolio of entry-level and low cost cars.

The automaker already has a China specific brand called Baojun under which it sells two models, the Baojun 630 which starts from $10,000 and the Le Chi that costs $6,400 upwards. It also has an array of microvans under the SAIC-GM-Wuling JV as well. GM is present in China through 10 joint ventures although the SAIC-GM-Wuling JV accounts for almost half of the sales.

GM also opened a new factory capable of producing 400,000 vehicles annually in the second half of 2012. At the same time, it is building another $1 billion plant in Southwest China, which will raise its capacity by another 400,000 units by 2015. [3] This additional capacity can help contribute to higher sales in China, which is the most important contributor to GM’s stock and accounts for 35% of our price estimate.

See full analysis for General Motors

Europe Is A Concern

GM is struggling in Europe. It has already lost more than a billion dollars in the first three quarters of 2012 and expects the full year losses to top $1.5 billion. [4] Even the company admitted that it is not likely to become profitable before the middle of the decade. The automobile industry in Europe is plagued with overcapacity, and labor unions put pressure on European governments that won’t allow automakers to shut down plants with surplus capacity.

For now, GM has reached an agreement to close down its Bochum plant in Germany but that will not happen before 2016. [5] GM had also purchased a 7% stake in French automaker Peugeot PSA as part of a strategic alliance in which the two companies had initially hoped to save $2 billion annually in shared R&D costs and share technological platforms. But that move doesn’t seem to be yielding the desired effects with GM’s growing discontent after Peugeot accepted the government bailout which will prevent any job cuts for French workers.

Ford announced its Q4 results last month and its European losses exceeded the company’s previous estimate. There haven’t really been any indications that the automobile market has begun to improve and considerable work still needs to be done by GM in order to turn around its European operations.

We have a near $27 price estimate for General Motors, which is about 5% below the current market price.

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Notes:
  1. Ford 10-Q []
  2. General Motors Says China 2012 Sales up 11% on Year, January 14, 2013, wsj.com []
  3. GM China Sets $1 Billion Plant, November 29, 2012, wsj.com []
  4. GM 10-Q []
  5. General Motors to close Opel plant in Bochum, December 10, 2012, bbc.com []
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