3 Reasons Why You Should Be Buying General Motors

Oct.25.13 | About: General Motors (GM)

General Motors (NYSE:GM) is still taking a lot of heat nearly four years after its bailout and high-speed bankruptcy proceeding. As many will recall, it was President Bush who initiated the bailout in late 2008, but it was President Obama who shepherded the wounded Detroit giant through the fast-packaged bankruptcy that left a lot of hard feelings. Some of those feelings were politically motivated by critics of the then-new administration. However, the majority of them were as a result of the court decision that left most General Motors stock holders empty-handed. The same hard feelings are still being witnessed to the present day.

However, I find such feelings to be obscuring something that is of vital importance: GM turning out to be an interesting story going unnoticed by investors. My personal take on General Motors is that the company has what it takes to go back to what it was prior to the bailout, judging by the recent results. GM's nine-month global sales rose by 4.6% to 7.25M vehicles and it had 2013 Q3 sales of 2.4 million vehicles -- 5.5% above the 2.27 million units sold in the third quarter of 2012. However, my positive feelings on the company are centered on three arguments.

1. General Motors' Huge Global Potential

Currently, the auto business is global, and as an industry with lots of fixed costs, economies of scale do matter a lot. For that reason, the size of any company in the industry is vital in more than just a single aspect. General Motors has been in business for more years than I can remember and, despite the bailout, it is still one of the three global auto giants, right up there among its peers Toyota (NYSE:TM) and Volkswagen AG (OTCPK:VLKAY) when it comes to sales. In fact, according to the recently released Q3 results, GM is still ahead of Volkswagen -- whose nine-month sales rose 4.8% to 7.03 million.

Also in 2012, GM managed to outsell both Volkswagen and TM, but the two rivals made a lot of money. How come? One reason stands out despite there being a number of them. It all comes down to efficiency; both Toyota and Volkswagen are more efficient in how they design and engineer their products. Therefore, they tend to benefit more from the global economies of scale.

GM, on the other hand, is focused on regaining its lost status in the global auto industry through reorganization and innovation. It is a giant taking baby steps toward recovery, and most of its efforts are beginning to yield. For example, just recently General Motors decided to alter sales structures to boost Opel's Russia revenues.

A change in GM's in-house sales organization structure should subsequently offer the much-needed support for its European subsidiary Opel, thus enhancing the German automaker's position in Russia. Mind you, Russia is likely to become the biggest sales market for European automakers in the years to come. In addition, the country is already Opel's third most important European market after Germany and the U.K., with the GM's subsidiary holding a market share of 3% in Russia and 6% in Europe in general.

2. Favorable Operating Environment

GM is currently benefiting from the economic recovery currently being witnessed in the United States, which is continuing to fuel auto sales. According to Reuters, August U.S. auto sales rose by 17%, an indication that the country is on track with the execution of its economic recovery plans. In addition, based on Q3 results, GM recorded the biggest increase in sales in North America with figures indicating impressive 6.5% growth in the region alone.

Also, according to reports, GM will be financing a $2.3B buy back of the UAW's preferred stock. The buyback will act as a contingent on the Detroit auto giant completing an offering of senior secured notes with maturities of 5, 10, and 30 years. The impact of such a move will be a boost to the company's credit rating leaving investors with lots of joy and optimism. However, what this really means is that GM is currently in a healthy financial position to service its debts and finance its growth.

3. Innovation and Its Ability to Tap Into China

China is still the largest automobile market in the world. However, the passenger car market remains highly fragmented with a total of 27 separate companies making cars. Volkswagen, with joint ventures in both Shanghai and Changchun, continues to be the leading brand in China with a market share of 21.8%, while General Motors comes in second with about 12.2%. Still, the Chinese market is still not yet fully tapped and automakers will have to be highly innovative when navigating their way to the customers.

GM's models like Buick and Cadillac continue to enjoy high demand in China as more people opt for luxury. In fact, the sizable surge in demand for Buick cars could be the reason for the increase in GM's market share in the country. However, GM needs to be cautious of Ford (NYSE:F) growing strength in the market, which by the way recorded about 71% rise in July sales on a year-over-year basis. Despite that, GM is gaining strength and the momentum of this growth is bound to continue considering the demand associated with its luxury brands like Cadillac.

In addition, since February this year, GM's Chevrolet began offering Siri voice-activated software in its MyLink-equipped Chevy Spark and Sonic models. Also, GM plans on offering the technology in six more of its models, a move that will definitely boost its sales.

Final Thoughts

The General Motors turnaround has surprised many in the automotive industry. If that is anything to go by, I can say that such a turnaround is nearly as dramatic as that of its oldest rival Ford. In one of the largest bankruptcies of all time, General Motors managed to emerge with a stronger balance sheet, one that boasts of more cash than the outstanding debt.

Come April 2014, GM will no longer have the U.S. government as a stakeholder, thereby causing the company's publicly traded stock to rally significantly from its current price of $35.50 (Oct. 21, 2013). This is according to the U.S. Treasury report to Congress, which indicated that the U.S. government was planning to sell its last GM shares come April next year. Also according to the report, as of Sept. 17 the government owned a 7.3% stake in GM, down from 13.8% as of June 12. Judging by its performance this year (the acquisition of Ally International in Q1, improved sales globally in both Q2 and Q3, and the government finally offloading its stake in the company), GM is meant to be a success story in the next few years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.