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General Motors Company (GM) designs, manufactures, and markets cars worldwide. GM, a leader in truck models, is expected to become more competitive in all segments after its cost base is significantly lowered. GM closed at $28.63 with 2.22% loss on January 22, 2013 with a volume of 18.54M, which was 58.06% more than the 30 day average volume of 11.73M. GM had been on a bullish run in the past 6 months, and GM's bullish factors will be identified in the following.

Bullish Factors

  • Treasury exits. The Treasury Department will begin selling off its remaining 19% stake (300.1 million shares) in GM, as part of the Obama administration's plan to unwind its bailout of the automaker. The plan is for the administration to divest itself of the remaining investment in the next 12 to 15 months.
  • Moderate market growth. GM expects modest growth in the global auto sales in 2013 as improvements in China and the U.S. will be offset by sluggish car sales in Europe. U.S. new car and truck sales reached a five-year high of 14.5 million in 2012, and many executives and analysts think they'll climb to 15.5 million this year. Easy credit and low interest rate could boost the car sales. The company predicts a 5% rise in the United States and international market. The Europe market is projected to shrink 4% in the year. GM will invest $1.5B in its North America facilities in 2013, as part of its $8B annual investment plan for its global operations for new vehicle developments.
  • Deeper cut. Seeing Germany at risk of slipping into recession, GM may close a German factory at its Opel subsidiary earlier than proposed. It is the first time the company has issued a specific timeframe for a deal in negotiations between Opel management and its Germany workforce. GM forecast Opel will have made between $1.5 billion and $1.8 billion in losses last year, with only a slight improvement expected for this one.
  • Volt with lower cost. Thousands of dollars in cost will be saved for the next generation of Volt, GM's hybrid car, by adopting a more efficient design, which help the company use smaller vehicle components and save weight. Ford Motor Co. (F), Nissan Motor Co. (OTCPK:NSANY) and Toyota Motor Corp. (TM) are all working on the hybrid-electric vehicles aggressively. It is the first time the company has issued a specific timeframe for a deal in negotiations between Opel management and its Germany workforce.
  • Expanding Buick's reach. GM expects the new Encore small crossover to bring more new customers to its premium Buick brand. Despite the pessimistic view from LMC Automotive's analyst, GM expects the segment in which Encore competes, small and mid-sized crossovers, to add more than 350,000 sales in the United States over next three years.

Analysts' Calls, Earnings, Key Stats, and Valuation

On December 24, 2012, Goldman Sachs reinstates coverage on GM with a buy rating and $35 price target. The firm expected 17% EBITA growth in 2013 driven primarily by the convergence of North American margins towards those at Ford and a secular improvement in Brazilian profitability. As reported, both these will be driven by major product refreshes into 2013, volume improvements and a benign input cost environment, according to the firm. On January 8, 2013, Standpoint Research downgraded GM from hold to accumulate.

Analysts, on average, are expecting an EPS of $0.51 with revenue of $38.74 for the current quarter ending in December, 2012. Analysts are expecting an EPS of $3.27 with revenue of $151.49B for fiscal 2012. For 2013, analysts are projecting an EPS of $3.83 with revenue of $156.94B, which is 3.60% higher than 2012.

GM has an enterprise value of $30.58B with a market cap of $44.84B. GM has a total cash of $31.92B with a total debt of $16.65B. GM has a book value of $19.97 per share. GM generates an operating cash flow of $11.27B with a levered free cash flow of -2.06B. GM's operating margin of 3.2%, ttm, and net margin of 2.9%, ttm, are lower than the industry averages of 4.3% and 5.4%, ttm, respectively. GM also generates lower ROE of 13.5, comparing to the industry average of 14.9. GM's P/E of 11.0 is higher than the industry average of 9.2. However, GM's forward P/E is only 5.5, which is lower than S&P 500's average of 13.3.

Technical Analysis

The MACD (12, 26, 9) had turned to show a bearish trend on January 16, 2013 and the MACD difference continued to diverge. The momentum indicator, RSI (14), is decreasing to 51.45 and moving toward middle-line. GM is currently trading above 50-day MA of $26.77 and 200-day MA of $23.38. The next resistance is $30.35, the R1 pivot point, followed by $31.88, the R2 pivot point, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

Options Strategy

In the short-term, there is a high probability that GM may be due for some consolidations. For long-term bullish investors, a credit put spread of $21/$23 can be reviewed when GM pulls back near $25/$26 price range.

Note: All prices are quoted from the closing of January 22, 2013 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: General Motors: A Better Road Ahead