Share prices are down, incentives are up, and domestic rival Ford (NYSE: F) beat General Motors (NYSE: GM) in monthly sales for just the second time since 1998. Amid all that unhappy evidence, investors are skeptical of GM's prospects. But they shouldn't be.
While the media have given favorable coverage to GM's new CEO Dan Akerson, some industry insiders harbor far less kind opinions. Akerson's recent comments about GM's business strategy evoked comparisons to loathed former CEO John Smale and the old GM's failed sales-at-any-cost approach. Share prices have languished below November's $33 IPO price for most of March. Clearly, the market isn't sold on the "Government Motors" story.
However, a closer look at GM's moves leads me to believe that the market is wildly underestimating its chances. Take yesterday's late-breaking news that GM sold off its stake in Delphi, pocketing a cool $3.8 billion in the process. With another $1 billion raised earlier in the quarter from the sale of preferred shares in Ally Financial, GM's $4.8 billion war chest should go a long way toward strengthening its balance sheet. Not satisfied simply having a net cash position like Ford's auto division, GM promised us asset sales in a push toward becoming debt-free, and it looks like the company's well on its way.
Part of the negativity surrounding GM relates to the disaster in Japan. Considerable uncertainty remains over what parts GM sources from Japan, whether the earthquake and tsunami affected those factories, and whether procuring alternate supplies will prove difficult. Production was suspended for a couple of days at the company's Shreveport, La., plant because of an unnamed part shortage. But even if the shuttering had persisted, the facility's Colorado and Canyon trucks are low-volume vehicles, accounting for only a negligible amount of overall production.
For Japanese automakers focused on "just in time delivery," the quake is a lot grimmer. Dramatic photos of destroyed vehicles ready for export have begun to surface. Nissan was forced to close five factories. Honda (NYSE: HMC) suspended all Japanese production, costing it 4,000 units per day. Toyota (NYSE: TM) lost production of 140,000 vehicles, and another half-million may be delayed. On the domestic side, things are different. Both Ford and Chrysler are limiting orders of certain color paint jobs, but for the most part, U.S. production remains unencumbered. Investors shouldn't dismiss the risk of supply disruption, but fears of mass shutdowns appear overblown.
Speaking of overblown, there's no rational basis for fears that GM management might drive off the incentive cliff in a vain attempt to hit aggressive sales targets. Yes, incentives were high, and they ramped up at the beginning of the year. But that was part popular loyalty program and part sales mix, specifically strong Cadillac sales. Thanks to the higher per-unit price, the luxury vehicles carry higher incentives. As my colleague John Rosevear highlighted, incentives should be down by $700 for March. With capacity utilization in the 90% range, and the company's lowest inventory levels in two and a half decades, I would expect that trend to continue until GM reaches the industry average.
Finally, GM is cheap on pretty much any basis you can come up with. The company's forward P/E is nearly half of the industry average, and even on an EV/EBITDA basis, GM puts in a good showing, especially against the five-star CAPS rated Tata Motors (NYSE: TTM).
If you don't own shares or just started building a position in General Motors, now looks like a good time to be aggressive. For investors who already own a sizable position, GM may not have dropped enough to double down, but it certainly deserves close watching.
Keep both hands on the wheel and your eyes on the road, and follow General Motors on your free My Watchlist page.
