People find happiness from various things and one of those things that surely makes him happy is paying off a lingering liability. The investors of General Motors (GM) would be having a similar feeling as the company recently took off a massive amount of liability off its back. The company announced an agreement to repurchase of its Series A preferred stock from the United Auto Workers (UAW) retiree trust to the tune of $3.2 billion.
The good news
As per reports, the company will finance the buy-back by issuing five, ten and thirty-year unsecured notes. The credit ratings firm Moody's responded positively to the debt issue and lifted its credit quality rating from junk status. While, these actions may appear normal for a company of GM's size but for investors of GM, this news brings massive amount of joy and optimism. The basic interpretation of a good credit rating is that the company is in a healthy position and possesses the capability to service its debt.
The growth story
GM has come a long way since its bailout in 2008 by the federal government due to its strong hold in big markets like America and China. A lot of analysts have debated that the company got massive amounts in bailout as compared to other companies and while that argument is fair, the tremendous growth of GM has justified the state's action to a good extent. It is clear that the company has picked up pace and built up potential for greater success.
The recovery in U.S economy has fuelled auto sales in the past couple of years. As this Reuters article reports, auto sales rose 17% in the month of August indicating that the country is on track with the execution of its recovery plans. Besides the large U.S markets, automakers are now rushing in to have a slice of the growing auto market in China. The Chinese economy's consistent growth has provided an opportunity for sectors like auto and retail to achieve healthy numbers.
Carmakers and China
Quite recently, Volkswagen opened a new car factory in southern China along with the plan to open another one with double the capacity. The company has understood the significance of China for its vision to become the biggest carmaker on the planet and as such, it is taking no time to step up production in the country.
Since Volkswagen houses around 12 brands, it can leverage the diversity in brands to attract a wide range of consumers. Though China represents a huge untapped market, the automakers will have to be highly skilful in navigating their way to the customers as the Government has cautioned its people to avoid any conspicuous spending.
While Volkswagen is making an entry into the Chinese domain, GM has established a reasonable share in the market. The company's Buick and Cadillac models have enjoyed high demand because of an increase in the disposable income of people, which has prompted them to opt for luxury cars. The sizable surge in demand for Buick cars has increased GM's overall share in the market.
However, the company needs to remain cautious of Ford's (F) growing strength in the country. Ford's YTD sales are up by approximately 50% as compared to last year. As per this corporate report, Ford drove a 71% increase in July sales on a y-o-y basis on the back of a huge increase in demand for Ford Focus.
A few moments ago, I mentioned that the automakers need to be skilful in their approach to the Chinese markets. However, the statement was not made only because of Government interference and influence but also for the sheer diversity that prevails in this young market. Consider this, GM has been gaining strength in the country because of its luxury brands like Cadillac whereas Ford has grabbed a larger share of the pie due to increasing demand for Ford Focus, a compact and budget car.
Innovation is must
Auto sales are a major indicator of consumer spending in an economy, besides retail and housing related numbers, and the U.S is putting up a strong show in all the three sectors. As a result of the healthy recovery in the country, carmakers like GM are seeing bright light at the end of the tunnel. In August, GM saw an increase of 22% in retail sales, which provides support to the recovery analogy.
Going ahead, the company should focus on innovation and new product launches in order to combat competition and maintain its share. It has already launched the new Cadillac CTS, which is a smart blend of luxury and performance but criticized by experts because of its high pricing.
The road ahead
There is not a lot of doubt that GM is getting back on track with a diverse product portfolio and better sales. Additionally, the company is pumping good amount of money to take leadership in large regions like Europe. Recently, its struggling brand Opel announced a plan to invest 130m euros in its German engine and parts plant. The investment is a major turning point for the company and its employees because it will provide a great opportunity to make optimal utilization of different resources.
Apart from investing in existing facilities, the company is also trying to go big in the electric car market. GM has decided to produce an electric car that will give a range of 200 miles before charging, which will directly compete with Tesla's advanced electric cars.
It is clear that GM is not leaving a single stone unturned to achieve a leadership position across different geographies and product categories. While this is a great recovery sign, the company should be cautious of not pushing the pedal so hard that it loses its existing share.
The big lineup of projects and a cheap valuation make GM an irresistible stock. Also, GM will have high leverage from financing its oncoming projects with cheaper debt thereby generating immense value for shareholders.
We have to acknowledge the fact that GM has visibly begun its journey to a robust turnaround and this is the right time to invest in the company as it is comparatively cheap. Additionally, the decision to replace shareholding of UAW with cheaper debt will help the company generate significant amount of cash that can be given in form of dividends or buy-back to the existing shareholders. All of this makes GM an ideal candidate for your portfolio.