After filing for Chapter 11 bankruptcy in June 2009, General Motors (NYSE: GM) has gradually been regaining its financial viability and plans to regain its lost market share by revamping 90% of its vehicle offerings by 2016. But will this initiative be enough to win back lost customers as well as attract new ones? Should you be thinking about adding GM stock to your portfolio again?
GM's Amazing Comeback
In the wake of its bankruptcy filing, GM undertook a reorganization and restructuring program that resulted in a leaner organization dubbed the "new" GM on July 10, 2009. The company shut down 14 of its plants in the U.S., which reduced its 88,000-strong workforce by 20,000 workers, as well as shedding some 2,400 of its 6,000 dealerships. In addition, it eliminated most of its brands, retaining only GMC, Buick, Cadillac and Chevrolet.
In order to help pay back its nearly $50 billion bailout to the U.S. government, GM had an initial public offering in November 2010, with its common shares priced at $33. After hitting an all-time low of $19.02 on July 24, 2012, share prices have started to recover. It recently topped its IPO price for the first time in close to two years with a closing price of $33.42. The stock closed at $33.93 on June 11 after reaching a closing level high of $35.03 on June 7.
Following its reorganization, GM quickly returned to profitability. In 2010, net income attributed to common stockholders hit $4.7 billion, its first annual profit since 2004, on the back of increased annual sales of $135.6 billion from $104.6 billion the previous year. In subsequent years, earnings jumped to $7.6 billion in 2011 before falling to $4.9 billion in 2012. For the first quarter of 2013, earnings hit 900,000 million, an 11% decline from the $1 billion reported in the same period last year. This brought fully diluted earnings per share to $0.58 from $0.60 in the first quarter of 2012.
Meanwhile, GM continued to gain ground in China, the world's largest automotive market, as it reported a 15.3% increase in April sales to 261,870 units. The company said it planned to invest some $16 billion in the country by 2016 and announced that it had acquired government permission to build a $1.3 billion factory in Shanghai as part of its plan to triple sales of Cadillac cars in the next two and a half years. The carmaker also reported encouraging results in the U.S., where its sales for April were 237,646 units, up by 11.4% from the same period last year. This increased GM's U.S. sales by nearly 10% for the first four months of the year, well above the average 7% growth rate of the industry. In addition, its market share grew to 18% from 17.7% last year.
In Europe, the carmaker continued to record losses of $175 million in the first quarter, although these were significantly less than the $294 recorded in the same period in 2012. The company said that the improved results put it on target to reach break-even in the continent by 2015, and it hopes to spur demand for its product by launching 23 new models by 2016.
For the second half of the year, GM anticipates better results as it is launching new models of its GMC Sierra and Chevrolet Silverado pickup trucks. Big trucks are typically among GM's most profitable vehicles, and this year sales will be greatly helped by a rebound in the construction and housing industries.
Another positive sign for the carmaker is its return to the S&P 500 Index. It had been dropped by the Index following its bankruptcy filing, but rejoined June 6, replacing HJ Heinz, which has been acquired by Berkshire Hathaway. This could boost GM's stock prices since index funds managers attached to the S&P 500 will have to purchase the carmaker's shares. Analysts estimate that as many as 87 million shares of GM could be purchased following its re-listing.
The Bottom Line
No one can deny that GM has done a great job in rebounding, recording 13 consecutive quarters where it reported a profit. However, the carmaker's future really hinges on whether or not it can regain lost market share in the U.S. as well as gaining market share in key markets such as China. For the first quarter of the year, GM's market share in China rose to 15% from the 14.6% reported in 2012. Ford, its closest rival and the second-biggest U.S. carmaker, had just 2.5% market share.
Meanwhile, political tensions between China and Japan have caused sales of Japanese carmakers such as Toyota (NYSE: TM) to also decline, although it remains to be seen if this is a long-term trend. Toyota reported in April that its sales in China had fallen for the ninth time in ten months, while other carmakers such as Honda (NYSE: HMC) and Nissan (NSANY.OB) similarly reduced output and cut profit predictions.
In addition, analysts believe that GM can gain market share in 2014 with a barrage of new product such as new model Cadillac CTS and Chevrolet Impala cars, as well as all-new pickups. GM is also refreshing one-third of its cars in 2013, which is the strongest in the auto industry. And in an attempt to spur sales further and win market share away from its competitors, GM is offering a two-year free maintenance program for certain 2014 GMC, Chevrolet and Buick vehicles, which cover tire rotations, a 27-point inspection at any participating dealership and oil and filter changes.
Buying GM stock now also makes sense since its share prices are trading at some seven times 2014 estimated earnings, making its valuation attractive. CEO Dan Akerson has also hinted that a dividend payout may be possible in the future as a way to return value to its shareholders.