General Motors’ Stock Worth A Spin Despite Europe Overhang

by Trefis Team
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General Motors (NYSE:GM) reported its seventh straight quarter of profit and is being regarded as one of the great turnaround stories of the current decade. The company, just after three years of bankruptcy, has $31.5 billion in cash and is performing well in the world’s largest auto markets of U.S. and China. It has a robust pipeline of new models which are expected to help it gather  more market share. However, investors are still wary of buying into the GM story and it’s stock price is stuck in low 20’s given the situation in Europe and pension fund liabilities.

General Motors competes globally with automakers like BMW (GR:BMW), Ford (NYSE:F), Daimler (ETR:DAI), Audi (NSU:GR), Honda (NYSE:HMC), Toyota (NYSE:TM) and others.

We currently have a Trefis price estimate of $27.50 for General Motors’s stock, which is more than 20% above the current market price.

See our complete analysis for General Motor’s stock

Poor performance in Europe

Europe that has been one of the company’s weak spots and is still making losses. In the first quarter of 2012, General Motors reported a loss of  $300 million in Europe as its market share in the continent fell down by 0.2%. GM luxury unit Opel which has been racking up losses in Europe for years continued to under perform. The company had taken a host of measures including restructuring to improve its performance and had broken even a year ago. However, the recent results have again cast a doubt over the strength of its recovery.

Underfunded pension plans

General Motors has an underfunded pension fund and will need to contribute a big chunk of its earnings to meet its liabilities. At the end of 2011, its shortfall was $25.4 billion. Considering the company is already grappling with pressure on its margins, this shortfall can have serious repercussions on its finances in the future. [1]

The auto industry is a cyclical industry which is currently going through a recovery period following the financial crisis. The company’s current results indicate that the company is handling itself well during this cycle; however, the real test will be how will GM fare if the economy slows meaningfully in the coming years.

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Notes:
  1. GM Chief Hopes to Return to Investment Grade Within a Year, Bloomberg, 18 May – 2012 []
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