Posted on 02 March 2012.
Has automaker General Motors (NYSE: GM) finally recovered from its near extinction in the throes of the Great Recession and become a good buy? North American operations have been growing strongly despite the poor economic environment as the public has embraced a new generation of vehicles. Still, GM is a turnaround in progress. I looked at the companies fundamentals as well as its market outlook to see if it is time to move General Motors to the buy category.
The company has a recent share price of $27 which places it in the middle of its $19.05-$36.15 52-week trading range. It has a reported earnings per share of $4.57 which translates to a tiny 5.98 price to earnings ratio. The share value is definitely at depressed levels, with its price per sales of 0.46 and a price to book of 1.24. More enticing is the book value per share which comes out to be $21.96.
Its February 16 earnings announcement for 4th quarter 2011 showed healthy North American operations growth with those divisions pumping out $23.1 billion in revenues for $1.5 billion in pretax earnings, a cool $1 billion increase in year over year numbers. But despite those exciting numbers, the overall profit was only $0.39 a share, a number which missed analyst predictions by $0.02 for in fact North America was fine but the rest of the global operations was a quagmire.
The big loser was General Motor’s European Operation where the company bled over $700 million in losses. The Opel AG Division in particular was staggered by a number of restructuring costs and ended up in the red to the tune of $600 million by itself. GM has come out to say that it is moving to resolve the problems, but I cannot see how any significant progress will be made while the Euro credit crisis plays out, and the while some observers think 2012 will see a rebound I expect 2013 to be the earliest the European operations will come anywhere near to breaking even, or showing a small profit.
Meanwhile South American operations continue to underperform with a $200 million quarter loss. There is more of a vision for a positive future here though. General Motors’ product mix has been aging here and a number of new models are starting to hit show rooms and if the reaction is half as good as that seen in the North American run outs there should be some excellent 2012 results in Latin America.
Other international results, especially in China, have been positive, with earnings at over $400 million before taxes, a $100 million improvement year over year.
Taken together there were high points and lows, but management was only able to squeeze out a return on assets of a miserable 2.56%. Take that with the overall disappointing earnings report and it is little wonder that investors are skeptical. Worse, General Motors is still struggling with its pension plans legacy. Those pension plans are underfunded to a tune of around $24.5 billion, still rising in 2011 year over year despite agreements between the company and its union to mitigate the damage.
So, General Motors has an extremely cheap price with lots of upside, but it still has to show it can find a way through the many problems it has to turn the company to consistent profitability. It has to contend with Ford (NYSE: F) not only for customers but for investors too. The rival has a recent share price near $13 with a price to earnings ratio of 6.70 – similarly low priced to General Motors and it too has seen an underperforming European division. But Ford has shown much more consistent improvement and in fact profits have stabilized so much that Ford reinitiated paying a dividend which now pays a 1.24% yield.
Of course the opposite end of the competitor scale is Toyota (NYSE: TM) which has a price near $84 with a price to earnings ratio of 41.70 – priced like an emerging tech stock. That is because Toyota’s earnings were shattered due to the Japanese earthquake fallout of 2011 and is only now starting to recover its production capacity. The problem is with the current price most of the potential growth is already priced into the stock and I see no opportunity here.
With current valuations General Motors is at an attractive price point. I have no doubt that the company will sort out its issues and return to a more aggressive profitability. My doubts are the timing, and I expect there will be more quarters of disappointment before General Motor’s turnaround is complete. I would want to watch a little longer before entering a position but investors with lots of patience probably can buy now. However, my preference is its competitor Ford, which has an almost identical price valuation, but is much farther along in establishing profits and dealing with its own problem areas.