Why GM Struggled in 2011

As the year comes to a close, it's helpful to look back at what happened to the stocks you follow. With a highly visible company like General Motors (NYSE: GM  ) , which is mentioned in the business news nearly every day, it's easy to get caught up in a short-term view of events -- but the longer-term perspective is what really matters when judging an investment.

Plain and simple, 2011 was a year of consolidation for the General. With his management team finally stable after a long period of churn and turmoil, GM CEO Dan Akerson was able to start implementing his long-term vision for America's largest automaker. But it will be several years before his vision becomes a reality, and the rough performance of GM's shares reflected that, as economic conditions continued to pose a challenge for the company.

General Motors' key statistics
The fundamentals weren't bad, especially given GM's recent history and challenging economic headwinds around the world, but there's considerable room for improvement:

Year-to-Date Stock Return (45.6%)
Market Cap $30.30 billion
Revenue, Trailing 12 Months $147.70 billion
Quarterly Revenue Growth (year over year) 7.80%
Earnings (EBITDA), Trailing 12 Months $11.94 billion
Quarterly Earnings Growth (year over year) (2.50%)
CAPS Rating **

Sources: S&P Capital IQ and Motley Fool CAPS. YTD return from market open on Jan. 3 through market close on Dec. 16.

Ouch. Revenues are up, but earnings are down as margins have come under pressure -- and the stock price got positively hammered, despite $4.57 in earnings per share over the last 12 months. So what happened?

Why the stock got clobbered
GM's new managers have actually executed quite well for the most part -- better than some of us expected -- but the company faced a number of headwinds in 2011:

  • Global headwinds. The white-hot Chinese auto market cooled considerably in 2011, though GM -- the market leader, via several joint ventures -- still managed to pull out decent sales growth. More importantly, the General's long-troubled European operation hit a crisis point as the European economy sagged, losing money in the most recent quarter and prompting a high-level review likely to lead to drastic action (a major restructuring, at least) early next year.
  • Pension liability. Despite GM's low debt, $30-billion-plus cash hoard, and respectable profits, many institutional investors have shied away from the stock out of concerns for GM's pension liabilities, which could -- some have speculated -- eat up much of that cash hoard over the next couple of years. CFO Dan Ammann recently said the company now estimates its liability at $8.7 billion and has promised to present more detail on the state of those obligations when GM's year-end results are revealed early in 2012.
  • Product line still a mixed bag. Rival Ford (NYSE: F  ) has managed to overhaul most of its product portfolio in recent years, creating a streamlined global lineup of vehicles that compete well with top rivals Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) while reducing ongoing development costs and improving margins. GM is determined to follow Ford's lead, but its product-development efforts were set back significantly while the company fought for its life in the years leading up to the economic crisis. GM's newest products are mostly top-notch (including the Chevy Volt, recent troubles notwithstanding) but many product-line gaps remain -- gaps that, in some cases, may not be filled until mid-decade. Meanwhile, heavy investment in developing new products and improving existing ones will continue to eat dollars for a while.

Long story short: GM is doing a lot of things right, but a lot of work remains -- and like any cyclical stock, macroeconomic expectations will have a big effect on its share price. There's a lot to like about GM as a value buy here, but investors will need to be patient -- and to stay informed as 2012 unfolds.

A convincing resolution of the pension issue and a restoration of GM's dividend would do a lot to improve the stock's prospects with institutional investors. While it's possible we'll see the dividend return in 2012, you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This new report is completely free for Fool readers, but it'll only be available for a limited time -- click here to get instant access right away.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 20, 2011, at 8:08 AM, joealray wrote:

    The headline looks deceiving, because GM made more money since a long long time. Their cars are selling well and things are going better then planned.

    Your headline should have read something like "Why is GM stocks so under valued"?

    But, I'm not surprised. Much of the media don't like GM and will still try to put them under. They'd rather support a foreign company instead.

  • Report this Comment On December 20, 2011, at 9:18 AM, TMFMarlowe wrote:

    @joealray: I own GM stock (and a Cadillac CTS-V, by the way) and have been cautiously singing the praises of current management's approach for months. The headline was referring to the stock price. The substance of the article -- did you read it? -- is a fair representation of my position. Care to read it again and restate your comment?

    John Rosevear

  • Report this Comment On December 20, 2011, at 12:02 PM, BFatConservative wrote:

    Great story. I've been following competitor Ford for nearly 9 months and find the same conundrum of increased profits, revenues, leverage picture, and product but with very little reflection in stock price. Sure there is some worrisome exposure to Europe, undefined pension liabilities, and margins that are less than ideal - but the picture gets a lot better when you know the UAW costs stay the same for the next five years, truly understand that European exposure isn't extremely material, and that the cyclical industry is just unsexy now. When that last point turns - I see the stock price more in line with the improved ops of the last few years.

  • Report this Comment On December 20, 2011, at 12:04 PM, BFatConservative wrote:

    @joelray - keep reading your conspiracy books.

  • Report this Comment On December 21, 2011, at 2:03 PM, r123t wrote:

    John-- I thought this was a great article, and your links were good too. Very fair and balanced. As a GM/UAW retiree (very interested in the pension plan, to say the least, and the VEBA healthcare plan for retirees, as well, dependent as it is on GM stock) I too sometimes feel the whole world is against us, but that too is an overstatement. We at GM have been given a second life, and I feel our current management team is very competent, and given time GM will be turned around, both as per the stock market and in the eyes of the public. After all, if we can sell 2 million+ cars and trucks in the present climate with a fair amount of negativity from our recent past still hanging in the air, we certainly should be able to improve upon that as we clear our image in the future. We have some great product coming on line, and we are getting smart in the ways we are marketing to the twenty- and thirty- somethings, i.e. the age groups that are going to make or break us in the future, and those that have little idea or prejudice about GM's past successes and failures.

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