Why Does General Motors Deserve Strong Consideration for Your Portfolio?


General Motors' Renaissance building in Detroit. Source: General Motors

General Motors (NYSE: GM  ) is on pace for a record year, though it's not the type of record investors will cheer. General Motors' previous record for annual recalls was 11.8 million vehicles, set back in 2004. General Motors has already pushed past that with its staggering total of 14.4 million vehicles recalled only halfway through 2014. In fact, GM is nearly on pace to top the entire automotive industry's worst year of recalls, by itself; the previous record was also set in 2004 at 30.8 million vehicles.

If you asked a group of investors whether or not they would add General Motors to their portfolios right now, most would likely answer with a resounding no. That's a completely understandable answer, but let's play devil's advocate and see if there's a place for GM in one's portfolio today.

GM CEO Mary Barra before the Senate Subcommittee. Source: General Motors

What have you done for me lately?
OK, so 2014 has admittedly been a disaster for the folks at General Motors. GM's stock price is down nearly 13% this year and its recall debacle is tragically linked to at least 13 deaths. This has no doubt overshadowed, and rightfully so, what was an excellent 2013 that provided many positive catalysts for America's largest automaker. Let's take a quick look back and try to understand what it means for GM's future.

Government Motors no more
One of the biggest positive events for General Motors last year was when the United States Treasury officially announced the end of its ownership stake in the once, and perhaps still, troubled automaker. Many investors avoided jumping onto the General Motors turnaround bandwagon because they knew the United States Treasury was going to be dumping millions upon millions of shares slowly; at its peak, taxpayers owned 60.8% of GM.

In addition to the U.S. Treasury selling the last of its General Motors shares, Moody's Investors Service upgraded General Motors' credit rating to investment grade last year -- a designation that had been lost way back in 2005. Nearly in unison with Moody's announcement, General Motors announced that it would repurchase 120 million preferred shares held by the United Auto Workers retiree medical trust for roughly $3.2 billion. The investment-grade rating will help the company get lower interest rates on large loans; repurchasing shares held by the UAW retiree trust was a big move to return value to common shareholders.

GM's Chevy Impala has won numerous awards. Source: General Motors

Improving designs drives sales
Another huge positive long-term development for General Motors investors is the company's plan to aggressively refresh its vehicle portfolio. During and after the recession the company was in such dire straits it didn't have the available cash to refresh its important vehicles, which sent already spiraling sales down faster.

That situation had to change and GM needed new and more competitive vehicles, fast. General Motors set forth on its plan to refresh 90% of its vehicles from 2013 to 2016, the company's most aggressive update in history. The early part of the vehicle portfolio refresh was kicked off with its most popular and profitable products, the Chevrolet Silverado and GMC Sierra, which should enable the company to grow its profits in the short term. As the company continues to refresh its vehicles look for sales and revenues to drive higher throughout the rest of this decade.

Show me the money
In addition to improving sales and new vehicle designs, GM is taking notes from its crosstown rival Ford  (NYSE: F  ) , which is years ahead in creating a more lean and profitable operation that has improved margins significantly. With the backing of its newer vehicles, higher transaction prices, and lower incentive spending, GM plans for its North American profit margins to reach 10% consistently by mid-decade. That's a very profitable improvement for investors -- consider that 2013's quarterly profit margins checked in at 6.2%, 8.4%, 9.3%, and 7.5%, sequentially.

Bottom line
Investors are right to be worried about the lingering effects from General Motors' massive recall debacle which has directly cost the automaker $1.7 billion in charges, thus far. Once the dust is settled that will likely balloon to a much higher figure, especially once lawsuits begin to settle. The final costs could be two to three times as high, not including what immeasurable damage could be done to GM's already battered brand image.

Very likely, General Motors' stock will bounce higher once the dust has settled, and long-term investors could get a very well positioned global automaker at a cheaper price than what they'd pay for its competitors, in terms of forward P/E.

GM had a great 2013 which set the stage for a real company turnaround. The recalls plaguing the company, while massive and detrimental in the short term, should only be a speed bump in long-term investors' grand scheme. 

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  • Report this Comment On June 16, 2014, at 12:55 PM, funfundvierzig wrote:

    General Motors is the Bank of America of car companies, and like fraud-infested Bilk of America, will have daunting multi-$billion legal troubles for years to come.

    After 38 recalls the past five months, 17 million GM cars and trucks practically all in the United States, we are more than mildly curious:

    Are there millions of GM cars in Europe and in India and in the Peoples Republic of China running the roads with hidden deadly defects?

    Inquiring investor minds want to know.

    ...funfun..

  • Report this Comment On June 16, 2014, at 1:13 PM, TMFTwoCoins wrote:

    Yeah, I certainly would like to know how many potential defects are running around as well. It's definitely a risk investors take with General Motors right now, that the recall numbers could continue to balloon out of control.

    That said, recalls happen, it's a part of the business and even the top brand's, see Toyota, have tragic instances like this. I hope GM has truly fixed its internal problems and that this won't be a reoccurring theme, as its obviously in the best interest for car buyers as well as investors.

    If Mary Barra can truly fix the internal issues, and this is an isolated massive recall debacle incident, GM's long-term prospects are still intriguing.

    Thanks for reading and commenting,

    Daniel

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