It's a mystery to many on Wall Street and probably to many in the company as well: Why is General Motors (NYSE: GM) stock so cheap?
Here's a massive company with brands that are instantly recognized around the world, a string of solidly profitable quarters, a good (and still improving) product line, tons of cash in the bank, and minimal debt. Even better, or so you'd think, it's still on an upswing -- its already-decent margins should improve in coming years as its aggressive managers continue to right-size regional operations and rationalize its global product portfolio. And it's the market-share leader in the world's biggest automotive growth market.
But for all that, GM is trading at less than five times earnings as I write this, and one big reason for that is that its huge operation in Europe is chronically ill: It hasn't had a profitable year in more than a decade.
But it's starting to look like that's going to change soon -- one way or another.
They can't keep Europe, but they can't dump it either
My colleague Joe Magyer, who follows GM for the Fool's Inside Value newsletter service, recently posted his thoughts on what he called "the 3 keys to fixing GM." Among other moves, Joe argued that the General should dump its European operation altogether and focus its resources elsewhere.
I have great esteem for Joe, whose thoughts on GM often mirror mine, but my first thought on reading his article was, "They can't dump Europe." Sure, GM Europe is a longtime money-loser, and the company recently announced it wouldn't meet its targets for 2011, but it's extremely important to the General for reasons other than profits. Simply put, Europe is a massive, wealthy automotive market, and GM's sizable presence in the region provides it with important economies of scale and engineering resources. A large presence in Europe is essential to GM's global vision and long-term strategy.
But that doesn't mean GM can't make some changes -- even drastic changes -- in its European operation. And a move made this week signals that such changes may be coming very soon: GM CEO Dan Akerson put Vice Chairman Steve Girsky in charge of Opel's board. The appointment of Girsky, a former investment banker who works closely with Akerson, follows the recent replacement of GM's longtime Europe chief -- and signals that big changes are in the works.
The emerging plan to fix GM Europe
To understand what might be coming, a little background is in order. GM's European operation has several parts, but the biggest and arguably most troubled part is Adam Opel AG, the German carmaker that has been a GM subsidiary since 1931. In some ways, Opel is still an expensive, old-line automaker -- although it has been restructured several times, powerful unions and government interference have so far forestalled the kind of deep cost cuts GM has been able to implement in the U.S. and elsewhere.
Opel builds and sells cars based on global GM platforms under the Opel and Vauxhall nameplates, as well as some export models under other GM brands (the current Buick Regal, a close mechanical relative of Opel's Insignia sedan, was initially produced by Opel in Germany). In addition to Opel's products -- and this is important, for reasons that will be clear in a minute -- GM also sells Chevrolets and Cadillacs in Europe, as part of its current strategy to establish those two brands in markets all over the world.
When it first emerged from bankruptcy in 2009, GM planned to sell Opel -- in fact, it had a group of buyers in place, led by megasupplier Magna International (NYSE: MGA), and strong support for the sale from the German government and Opel's powerful labor unions. But several of GM's then-new board members, including now-CEO Dan Akerson, halted the sale at the last minute. Their reasoning at the time included the need for scale and presence, as well as another: Ford (NYSE: F) was planning to take the excellent small cars designed by its European division -- the Fiesta and Focus -- and make them global models to compete with Toyota (NYSE: TM) and Honda (NYSE: HMC) here in the U.S. and elsewhere in the world. The board members wanted GM to follow the same path.
Now, a couple of years later, GM has rolled out an updated slate of small cars -- but they were designed in Korea, not Europe. And GM has begun the process of establishing Chevrolet and Cadillac -- brands that are separate from Opel -- in Europe.
Could GM be gearing up to dump Opel -- and build out an expanded presence in Europe without it?
Dump Opel, keep Europe?
I've thought for a while that getting rid of Opel (in several years, once Chevy and Cadillac are established players in the European market) would be GM's ultimate long-term strategy. Opel has too-fat labor contracts and more factories than it needs -- just like GM itself did in the U.S. several years ago. But cutting costs -- or as Akerson prefers to express it, lowering the division's break-even point -- has proved a lingering challenge.
Akerson and GM CFO Dan Ammann have both said that "all options are on the table" with Opel, and Girsky's assignment makes it clear that drastic action is likely sooner rather than later. Opel may not end up being sold -- Magna's no longer interested, according to reports, though a deal with GM's China partner SAIC is not outside of the realm of possibility.
But other drastic options are possible. If no buyers for Opel materialize, or if GM decides that it can't sell Opel without giving up important intellectual property, GM could put its subsidiary into bankruptcy in hopes of forcing a drastic high-speed makeover. Alternatively, Girsky could choose a more straightforward restructuring, reworking the company's union contracts and closing underutilized factories.
The upshot
Here's what I expect: I think GM is likely to announce its plan for Opel sooner rather than later -- early next year. I think it's likely to be a drastic plan with a drastic timetable, either a sale, or a very quick, very deep series of cuts and changes. I think Opel will be fixed or dumped, once and for all. I think Chevrolet in particular will become a much more prominent brand in Europe, no matter what happens to Opel. But I don't think GM is going to abandon the European market, because it's too important to the company's overall strategy.
- Add General Motors to My Watchlist.
- Add Ford to My Watchlist.
- Add Toyota to My Watchlist.
- Add Honda to My Watchlist.
- Add Magna International to My Watchlist.
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