Why You Should Stay Away From GM for Now

GM is under pressure from various angles and it might take some time before the company gets back on track.

Feb 26, 2014 at 1:35PM

General Motors (NYSE:GM) has been disappointing this year. The stock is down around 12% as the automaker's recently published results for the fourth quarter disappointed due to weak performance in Asia and South America. However, CEO Mary Barra expects an improvement in GM's performance in the next quarter, as the company is investing $1.1 billion to shore up operations in Europe and South America. In the wake of stiff competition from Ford (NYSE:F), can GM stage a comeback?

A closer look at GM's results
General Motors' fourth-quarter net profit rose 2% from last year. In North America, revenue increased 3% from the previous year, while in China, it rose 11.4% as a result of record sales of more than 3 million vehicles.  Also, in the second half, a year-over-year improvement was seen in Europe. GM's quarterly earnings amounted to $0.57 per share as revenue in the quarter rose slightly to $40.5 billion from $39.3 billion.

Though GM performed well in certain regions, there are areas where it has to focus to improve its performance in the future. In markets such as the Middle East, India, and Southeast Asia, GM is still under pressure. It has already taken Chevrolet out of the European market and it now plans to close down the brand in Australia as well. So, GM is now focusing on its restructuring strategy to improve its performance.

The road ahead
GM is focusing on various segments worldwide to improve its profitability. The launch of 15 new models in the United States should help GM improve its position in the market. Out of these new models, four are high-volume trucks and SUVs, which should help GM reinvigorate the pickup truck market in the U.S. The company's pickups are critically acclaimed -- the 2014 Chevrolet Silverado was awarded the title of Cars.com's "Best Pickup Truck of 2014".  

Due to stiff competition from peers, even this might not be enough for GM. Higher incentives from competitors such as Ford and Dodge have hurt the sales of GM's trucks. So, the company might face some difficulty in growing sales in such a competitive environment.

Ford's F-Series trucks have been best-sellers in the U.S. for 37 years, and this segment would be a tough nut to crack for GM if it wants to dent Ford's share. GM's Silverado and Sierra sales took hits in December, declining 16% and 4.6%, respectively, while Ford's F-Series sales went up 8.4%. Similarly, sales of the F-Series were almost flat in January while Silverado and Sierra sales went down 18.4% and 13.5%, respectively. GM is looking at innovative moves such as building an aluminum-bodied pickup truck by 2018 to counter the competition from Ford (which revealed an aluminum-bodied F-150 in January) and improving fuel efficiency. 

More moves
Given the competition in the domestic market, GM is focusing on China. It has announced new or redesigned Chevrolet vehicles, including a new compact SUV, to benefit from the booming auto market in that country. The compact SUV segment in China is growing at a brisk pace, and the market is dominated by Ford's EcoSport, which sold 59,680 units in the nation. So, GM has a tough rival already present in the market and since it is late with its compact SUV, it remains to be seen how the company will manage to make a mark.

Also, GM faces certain troubles regarding the quality of its vehicles. The problem of faulty ignition switches in GM cars is turning out to be bad PR for the company. It has been reported that six people have been killed in GM cars that had faulty ignition switches, and this might scare a few customers away.

In response, the company is recalling 780,000 older models of its compact cars. This might not prove to be enough. Competitors such as Ford and Chrysler might gain advantage in the market as consumer confidence in GM's vehicles takes a hit.

Also, GM is adopting a restructuring strategy to improve its operations. It plans to invest $1.1 billion to reconstruct its operations in Europe and South America. The company is also focusing on China, the largest automotive market in the world, targeting consumers with its Cadillac and Chevrolet brands. 

In addition, GM is also working on branding strategies to improve the images of Cadillac and Chevrolet. Emerging markets are seeing strong growth so GM CEO Mary Barra is aggressively focusing on them: "We're taking advantage of our strength in these countries to restructure and make the investments necessary to grow profitably in other parts of the world." 

Is it a good buy?
Despite GM's woes, many analysts expect the company to do well in the future. Looking at its price to earnings growth ratio, GM looks like a good investment as of now. However, on a trailing P/E basis, GM is more expensive than Ford. This makes GM look like a weaker proposition than Ford, which is working aggressively on its marketing strategies, another factor that could hurt GM in turn.

GM posted disappointing results and it is facing losses for many reasons. Analysts expect GM to be a profitable venture in the future, but Ford looks like a better investment option. So, investors should watch GM from the sidelines until and unless there are concrete signs that the company is gaining share and its operations are improving.

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Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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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Jun 12, 2015 at 5:01PM

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