The beginning of the year 2013 marked an upward trend in the cyclical goods and services sector, as the global economy is taking a route to recovery. General Motors (NYSE:GM), along with other market players of the automobile industry, namely Ford (NYSE:F) and Toyota Motors (NYSE:TM), reported an increase in earnings at the start of the year. GM's financial segment also reported an increase in earnings.
Analysis of the Annual Performance
GM reported an increase in earnings of 1.3%, aggregate earnings of 152 billion in 2012. GM reports revenue based on two core operations i.e. automobile and finance segment. The automobile sales revenue increased by 0.96% in a year. It should be noted that the automobile base for GM is extensive, and a large scale increase in sales is required to show a big percentage increase in sales. The financial revenue increased by 39% year-over-year. The financial segment is in its expansive stage, and thus has an enormous potential for growth.
The company reports its automobile earnings in 4 automotive segments mainly: GMNA, GMSA, GMIO and GME. General Motors has a strong position in terms of market share in the most powerful economies, namely USA and China. Production volume went up by 2.9% worldwide mainly originating in China - sales in China have reached 1 million units for the company.
However, the overall momentum in the earnings was hindered due to a decline in sales in the GME segment by 5.6%. European debt crisis and lack of consumer confidence played a significant role in bringing down the sales.
A fall in earnings culminated in a low EPS of $2.92 as compared to $4.58 last year. However, another reason for the earnings decline was an impairment charge. The company was able to report positive earnings in spite of an economic downturn, and announced certain rigorous undertaking to counter the decline. The company was able to report an increase in capacity utilization of up to 97.5% due to reinvestment in cost-effective strategies. Thus, the overall performance remained up to the mark; subject to external shocks rather than internal inefficiencies.
Due to extraordinary potential displayed by the Chinese economy, the company plans to expand production capacity by 30% over the next three years. The decision is expected to garner increase in earnings as well as cash flows.
The management has decided to concentrate production in two high-end segments, mainly SUVs and Luxury vehicles, which should support the margins of the company. CAPEX has been going up for the company over the past three years; capital expenditures have more than doubled during the past three years, and currently stand at over $9 billion. The increase in total asset based was backed by equity financing indicating low associated risks.
As I mentioned above, the company pursues aggressive growth strategies, and therefore, it did not declare dividends on its ordinary stock. However, dividends were paid out on its preferred stocks. Therefore, for an investor seeking a stable source of income, GM would not be an ideal option.
The free cash flows of the company have shown improvement over the past twelve months, mainly due to a solid increase in operating cash flows. The liquidity position improved by 0.7% despite a decline in net earnings, since a high portion of the costs comprised of non-material expenses, such as goodwill impairment. This is one of the major reasons why there is a consensus among analyst for a strong buy recommendation. For an investor seeking a high-growth stock, GM is the perfect buy. Furthermore, GM has ROE of 23.1%, above the industry average of 14.9%.
In my opinion, GM possesses great growth potential, and it will yield substantial return on investment in the next 3 to 4 years. However, the company performs in an industry prone to high market risk due to the cyclical nature of the industry prone to shifts in consumer demand and changes in the income. The financial arm of GM is subject to interest rate risk and credit risk, and hence puts the company at a vulnerable spot. However, the finance segment only comprises a small portion of its operations. Nonetheless, GM remains a lucrative investment, especially for high growth portfolios, as its future expansion plans begin to pay off.