General Motors Pre-Earnings: Cruising In North America And China While Europe Sputters

| About: General Motors (GM)

General Motors (NYSE:GM) is scheduled to announce its Q4 and full year results on Feb. 14. The automaker's stock had a strong run at the start of 2012, but dipped to as low as $19 over concerns about its burgeoning European losses. However, the stock has risen again in the last six months as it consolidates its North American and Chinese operations while carrying on with its restructuring in Europe. The U.S. government's decision to eventually sell its stake in the company at $27.50 per share also buoyed the stock price recently.

Solid on Home Turf

Overall, GM has had a solid year in North America with sales up 4% in the U.S. in 2012. It will be looking to improve its profitability, though, since its North American operating margins of 7.5%-8% currently trail Ford's margins of 10.5%-11%. Furthermore, we might see some weakness this quarter since GM was struggling with soaring inventory levels and had to resort to huge incentives to clear its stockpile.

On the bright side, 2013 could see the situation turning around as the automaker plans to introduce a total of 13 new or refreshed models under the Chevrolet brand. The refreshed models, including newer versions of Silverado and GMC Sierra, could help lift pricing and eventually improve margins.

The Dragon Sizzles

China accounts for more than 30% of the automaker's global sales. In fact, GM now sells more vehicles in China than it does in the U.S. In 2012, it sold 2.8 million vehicles in the country, up 11% year on year. One of the reasons why GM is successful in China is because it has a strong portfolio of entry-level and low-cost cars.

The automaker already has a China specific brand called Baojun under which it sells two models, the Baojun 630 which starts from $10,000 and the Le Chi that costs $6,400 upward. It also has an array of microvans under the SAIC-GM-Wuling JV as well. GM is present in China through 10 joint ventures although the SAIC-GM-Wuling JV accounts for almost half of the sales.

GM also opened a new factory capable of producing 400,000 vehicles annually in the second half of 2012. At the same time, it is building another $1 billion plant in Southwest China, which will raise its capacity by another 400,000 units by 2015. China is the most important contributor to GM's stock price, as per our estimates.

Europe Is a Concern

GM is struggling in Europe. It has already lost more than a billion dollars in the first three quarters of 2012 and expects the full year losses to top $1.5 billion. Even the company admitted that it is not likely to become profitable before the middle of the decade. The automobile industry in Europe is plagued with overcapacity, but the labor unions and governments won't allow the automakers to shut down plants with surplus capacity.

For now, GM has reached an agreement to close down its Bochum plant in Germany, but that will not happen before 2016. GM had also purchased a 7% stake in French automaker Peugeot PSA as part of a strategic alliance in which the two companies had initially hoped to save $2 billion annually in shared R&D costs and share technological platforms. But that move doesn't seem to be yielding the desired dividends with GM's growing discontent after Peugeot accepted the government bailout, which will prevent any French job cuts.

Ford announced its Q4 results last month and its European losses exceeded the company's previous estimate. There haven't really been any indications that the automobile market has begun to improve. Thus, considerable work still needs to be done by GM in order to turn its European operations around.

We have a near $27 price estimate for General Motors, which is about 5% below the current market price.

Disclosure: No positions.