Seeking Alpha
Growth, long/short equity, research analyst, tech
Profile| Send Message|
( followers)

General Motors Company (NYSE:GM) recently released its FY 2013 full-year financial results. The world's second-largest auto-manufacturer lost around $800 million in Europe during FY 2013. That was less than half of the $1.9 billion it lost in FY 2012. This reflected a slight recovery in the company's performance in Europe. Investors still have concerns regarding the company's prospects in Europe so my article will analyze the current performance of the company in Europe as well as its future outlook.

The company is involved in designing, manufacturing, and selling cars, trucks, and automobile parts around the world. Additionally the company also provides automotive financing services through General Motors Financial. The company operates via its four automotive segments: GM North America (GMNA), GM Europe (GME), GM international operations (GMIO) and GM South America (GMSA).

Since my article is aimed at analyzing the company's GME segment let us check the materiality of the company's GME segment.

Materiality of the Company's GME Segment and its Performance

Source: GM 10K Filing

The table above shows that GME generated 16.9% of the company's total revenue in FY 2011, 13.8% of the company's total revenue in FY 2012 and 13.2% of the company's total revenues in FY 2013. Although GMIO and GMSA are also losing their shares in the total revenue generated by the company this time around I am only focusing on GME. GMNA has improved its contribution to the company's total revenue from FY 2011-2013 so it is a growing segment for the company.

I will refer back to GME's contribution to the company's income generation in the segment's performance analysis below.

Performance Analysis

Revenue

The following table shows why GME is a cause for concern. The segment has recorded negative revenue growth for the past two FY. GMIO has also disclosed an 11.72% decline in its revenue for FY 2013 but has recorded a 9.14% growth during FY 2012.

Source: GM 10K Filing

A recovery in GME's performance is evident as the revenue from GME dropped 2.8% during FY 2013 after declining by 17.75% in FY 2012. I will discuss the future outlook of the European market further on in my article. For now, let us check the company's market share in Europe.

Source: GM 10K Filing

The table above shows that the company's market share in Europe has declined from 8.7% in FY 2011 to 8.3% in FY 2013. As a result, the company has plans to restructure its operations in Europe.

Next we will analyze the segment's contribution to the company's overall earnings.

Earnings

The following table shows that GME is the only segment that has incurred losses since 2011. Although the company recorded a decline in its loss before taxation in FY 2013 I will further analyze what the future holds for the company in Europe. Currently the GME segment is just draining the earnings the company is making from other segments.

Source: GM 10K Filing

Finally, it is time to determine the company's future outlook.

Future Outlook

The company's management is aiming to break-even in Europe by mid-decade. The money lost on the Chevrolet project was the company's most recent setback in Europe where it has lost billions in recent years. I will discuss this in the self-help paragraph below. The company's CFO said there would be more charges in the year ahead in Europe mainly severance costs related to shutting down an assembly plant in Bochum, Germany. Other automakers, including the company's American competitor Ford Motor Company (NYSE:F), have also been hurt in Europe where demand for new vehicles has extended its slump.

European Automotive Industry Outlook

Source: GM 10K Filing

The table above shows the decline in Europe's total retail vehicles industry volume. In 2013 the European automotive industry was severely hurt by the ongoing debt crisis, high unemployment, and lack of consumer confidence along with overcapacity. Western Europe generated 70% of Europe's total retail vehicle sales volume in 2013 that is why I will determine its future outlook for automotive industry.

Western Europe's car market is forecast to decline further till 2019. This will result in more plant closures in the region. General Motor's decision to withdraw one of its brand and close down its facilities as part of its restructuring plan is in-line with this market trend. According to AlixPartners, car sales in Western Europe are projected to drop to 12 million in 2014 declining from 13.2 million in 2013. This is due to unemployment, reduced spending power, and negative consumer trends. Nevertheless it is likely that unfavorable economic conditions and their effect on the European automotive industry will not considerably improve in the short-term.

The company's deteriorating market share in the declining European automotive market has forced the company to make changes that I will discuss in the following heading.

General Motors' Self-help: Withdrawal of Chevrolet Brand from Europe

In December 2013 the company announced its plans to stop mainstream distribution of the Chevrolet brand in Western and Central Europe by 2015. The company will focus its marketing and product portfolio on the Opel and Vauxhall brands. This decision will affect 1,200 Chevrolet dealers and distributors in the relevant countries and 480 Chevrolet Europe employees. The company has recorded pre-tax charges of $636 million during Q4 FY 2013 with respect to this transaction. It further expects to incur up to $300 million charges for exit costs during the first half of 2014. Afterwards, the company will have more resources to devote to capturing potential from growing markets and ultimately improving its overall results.

Analyst Expectations and My Verdict

Citi research analysts reiterated their buy rating for General Motor's stock after the release of the company's Q4 FY 2013 results. Analysts are expecting the company to achieve a 5% EBIT growth to $9 billion in FY 2014 while for FY 2015 the company is projected to earn $11.6 EBIT. The company's stock is currently trading around $36 while analysts have a target price of $48 on the company's stock. The company has also declared its first dividend of $0.30 per share in January 2014 payable in March 2014. As a result, both capital gains and dividends will be received by the company's investors. Europe has hurt the company's bottom line for the past 3 years. Looking ahead, the company's restructuring plans in Europe will reduce the impact this region has on the overall results of the company making the company's stock a good buy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article

Source: General Motors Is A Good Buy