Both Wall Street and Main Street love to beat on General Motors (NYSE: GM ) . After a taxpayer bailout nearing $25 billion, few have looked kindly on this automotive giant. After falling from its lofty pre-recession heights, is GM now the right pick for your portfolio?
Waxing and waning fortunes
European economic insanity struck automaker revenues hard in 2012. GM and Detroit-based rival Ford (NYSE: F ) posted significant quarterly losses recently of $361 million and $404 million, respectively. Ford's projection of a $1 billion loss in the region cast doubts on GM or its major rivals making a profit in Europe anytime soon.
In the U.S., both Ford and GM have lost ground against their recovering Japanese peers, a bad sign in the US market given the strength of the yen against the dollar -- making U.S.-produced cars more profitable for Toyota (NYSE: TM ) and Honda (NYSE: HMC ) than those built in Japan and sold elsewhere (most of the vehicles these automakers sell in the U.S. are made in America). Still, one couldn't blame investors for taking a shot on GM's stock on a pure value play. The stock is trading at a P/E of 7.8, and with a forward P/E of 4.9, making GM look cheap and due to make up some ground.
The American market has been much kinder to major automakers, with GM and competitors Toyota, Ford, and Honda all posting year-to-date sales growth. GM's domestic growth has lagged compared to its peers', however.
U.S. YTD Sales Growth
U.S. Market Share, YTD 2012
U.S. Market Share, YTD 2011
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|General Motors||2.7%||18%||20%||Add GM|
Source: The Wall Street Journal.
GM looks good financially. The company boasts an industry-beating return on investment of 11.9% for the trailing 12 months. Operating margins come in at 5%, right around the industry average, but certainly with ample room for improvement. Perhaps most inviting, GM's long-term debt-to-equity falls far below the industry average at a mere 32%.
The beleaguered automaker certainly has the flexibility and size to turn things around in the short-term. To see the big picture of GM, however, investors need to keep a cautious eye on two troubling trends.
New threats rising
GM faces emerging new competition as it looks for future growth. Overseas, China and India represent two of the biggest targets for automakers. With the rise of low-cost options such as Indian company Tata Motors (NYSE: TTM ) and China's domestic automakers, however, GM and its traditional rivals will need to beat this stiffening competition in developing, high-growth economies.
Chinese car alternatives in particular pose a lethal problem; they have scored major hits in developing markets from Brazil to South Africa, where local consumers lack the purchasing power needed for GM cars. With the Chinese market alone growing by 11% in July -- and that's a slowdown from June's 15% -- GM can't afford to slip up in this and other emerging economies.
Demographic challenges of an urban youth
Demographic sales numbers hurt GM's long-term outlook even more. U.S. auto sales to the 18-to-34-year-old cohort slumped to 11% in April of this year, a full 6 percentage points lower than in April 2007. GM and other automakers have been unable to attract the Millennial generation as young people opt for technology or similar purchases in a weak economy. The recession and youth unemployment rates deserve some blame for this trend, but a generational shift in consumer preferences would greatly harm the future fortunes of automakers.
GM ultimately must find a strategy to sell to Millennials and defeat the perfect storm of a generation raised during a volatile economy and gas prices wavering in stratospheric territory. With the entrance of car-sharing rivals such as Zipcar and technology's dominant claim on youth pocketbooks, GM's task of driving enthusiasm about car ownership won't be easy.
Burgeoning urban population growth could further hurt GM's long-term prospectus. With global cities expected to grow by 60 million per year, the need of cars in the tightly packed concrete jungles of tomorrow could drastically decline. With grandiose mass transit initiatives proposed from Beijing to California, GM could find itself in a long-term fight against time and population movement.
Investors interested in GM should be able to capitalize in the short term as the company rebounds from its recessionary woes. The automaker's financials are solid and it should grow domestic sales as the economy improves. However, between European chaos in the near term and demographic and geographic challenges on the horizon, GM could find that its best days are behind it.
General Motors isn't the only cheap American automaker out there. Ford is gaining steam as it too picks up the pieces from the 2008 economic crisis. To check out more about Ford's future opportunities and threats, take a look at The Motley Fool's new premium report, complete with a full year of updates.