General Motors (GM) yesterday reported its best U.S. December sales figures in 5 years. The Detroit based automaker reported a YoY increase in sales of 4.9%, compared to the consensus estimates of 2.1%. On an adjusted basis, sales increased 8.9% YoY, above consensus estimates of 6.7%.
Compared to 234,351 units a year ago, GM delivered 245,733 cars and trucks in December (26 selling days vs. 27 in December 2011). The automaker closed the year with total GM sales of 2.6 million in its home market, an increase of 3.7% YoY.
All brands made sales gains from a year ago. Chevrolet sales increased 7.7% to 167,091 units. Cruze compact car sales jumped 32.2% to 21,230 units. Buick enclave had another outstanding month; the vehicle saw deliveries increase 13.1% to 6052 units as customers sought the recently launched redesigned model. Total Buick sales rose 14.2% to 16,473 units. Cadillac sales improved 16.6% to 18,248 units and GMC sales rose 8.7% to 43,921 units.
The large pickups stock fell to 221,649, in line with the year-end target of 220,000, and down from 245,853 at the close of November. Overall, GM's car and truck inventory closed 2012 at 717,025 units, higher than the range of 650,000 to 670,000 it sought at the beginning of the year.
GM's market share witnessed a near two point decline and fell to 17.9% from 19.6% in 2011, dented by competition from Toyota (TM) and Honda (HMC) which recovered from 2011 earthquake-related setbacks. In the years before the economic downturn GM would routinely report more than 24% of annual industry sales. Commenting on the drop in market share Mark Reuss, VP, President, GM North America, said that given the age of the GM's product portfolio the loss in the market share is not surprising.
"Our portfolio is the oldest in the industry. Give us 18 months, and you're going to see the whole portfolio turn. It will be the biggest portfolio turn, I think, in U.S. history," Reuss told analysts and journalists during a conference call yesterday.
Despite the fiscal policy challenges, GM expects 2013 SAAR to improve driven by the macro recovery. The automaker expects 2013 U.S. light vehicles SAAR of 15 million to 15.5 million units.
Other Developments - Government Motors End in Sight
GM announced last month that it would buy back 200 million (40%) of its shares from the U.S. Treasury for a total of $5.5 billion ($27.50 per share). While the market was expecting a buyback, the timing and the magnitude of it came as a positive surprise. The timing suggests that the 4th quarter cash flow is likely running stronger and the company remains confident in its 2013 cash flow outlook despite pressures in Europe. The buyback paves the way for improvements in earnings, culture and image of GM.
The announcement came in conjunction with the U.S. Treasury announcement that it would exit its stake in GM within 12 to 15 months. The government, starting in January, plans to sell the remaining 300 million shares in the open market in an orderly fashion in the period specified above.
The buyback reduces the outstanding shares by approximately 11% and should drive EPS higher. Despite the buyback GM's balance sheet remains strong; the company indicated that it expects to end 2012 with $38 billion of liquidity, or an implied $27 billion in cash after revolver capacity. The buyback is a vote of confidence from the management and it should lead to better appreciation of GM's low valuation.
As a result of the share buyback certain mandated US governance requirements have been relinquished; however, management compensation restrictions still remain in effect until the government's stake is completely eliminated.
Financials And Valuations
GM has a price to earnings (P/E) ratio of 11.2 compared to the industry average of 9.6. It has a forward P/E of 5.8 compared to 14.2 for the S&P 500. It has a PEG ratio of only 0.4. Compared to GM, Ford (F) has a forward P/E of 6.8 and PEG ratio of 0.5.
General Motors has a price to book ratio of 1.5 compared to the industry average of 1.4 and Ford's price to book ratio of 2.7. GM has a price to sales ratio of 0.3 compared to the industry average of 0.5 and Ford's price to sales ratio of 0.4. The company has a price to cash flow ratio of 4.4 compared to the industry average of 6.3 and Ford's price to cash flow ratio of 5.8.
GM has a mean recommendation of 2.0. Out of the 19 analysts tracked 9 have a buy recommendation for Ford, and 6 analysts have a strong buy recommendation. The stock is trading at $30.2. It has a mean target price of $33.94 and high end target price of $44, representing an upside potential of 12% and 46% respectively. The stock gained 2.4% yesterday after the December sales announcement.
We have a buy rating on GM. We remain positive on both GM and Ford as both automakers continue to post strong results. Even after the buyback GM's balance sheet remains strong, which the automaker can use for potentially further buybacks, Europe restructuring and acquisitions. The elimination of the government motors stigma should also result in a modest mid-term boost. Favorable industry dynamics, strong balance sheet, significant growth potential in China (strong presence in emerging markets), and exposure to North American industry strength all boost our confidence in GM and we expect GM to be one of the best performing auto stock in the next few years.