7 Reasons Why General Motors Can Be a Buy

General Motors (NYSE: GM  ) recently posted record-high net income of $7.6 billion for the year 2011, but its fourth-quarter results were disappointing. In the last quarter, the company doubled its income in the home market while posting losses in Europe for the 12th consecutive year.

This prompts me to take a close look and find out how the company measures up in the long run.

The bright side

  1. Earnings from the company’s North American operations during the quarter nearly doubled to $1.5 billion. Sales of new car models such as the Chevrolet Cruze compact pushed up the numbers, helped by a good auto market.
  2. According to market analysts, the average age of cars in America is 11 years -- the highest it’s been since 1995. This makes me hopeful about the growing demand for new cars in the near future, which will potentially improve GM’s performance.
  3. GM earned 33% more from its international operations in the quarter compared to last year. With emerging economies such as China contributing heavily to its international operations, I think this growth is fairly sustainable.
  4. GM is curbing costs to improve operational efficiencies. The company centralized its global operations, saving $500 million in costs in the last quarter. Both cost-restructuring in Europe and debt-restructuring are expected to improve the quality of GM’s earnings.
  5. The company has a $13.3 billion pension funding shortfall. This is cause for concern, as it depletes the research and development and marketing spending. However, this shortfall is less than that estimated by analysts.
  6. Despite the pension funding burden, GM plans to boost its capital spending this year to $8 billion in order to launch new car models and pump up its sales.
  7. A low price-to-earnings ratio of six seems to be the best part about the stock. GM looks quite cheap right now.

On the flip side
GM needs to clean up its act in Europe. Losses in Europe have been pulling down profits for over a decade now. In the last quarter, the company suffered a loss of $600 million in Europe alone. Also, in South America, GM lost $200 million during the quarter.

GM is taking steps to restructure and make its European business profitable. At the same time, it is likely to benefit from cost efficiency moves and a pickup in the auto industry in North America and Asia. General Motors appears to be strengthening, and the stock price looks reasonable. Perhaps this is the perfect time to buy into this turnaround story!

What do you think? Post your comments below.

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Navjot Kaur does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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