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Summary

  • General Motors is trying to improve its image, and has stepped up its quality control to improve customer safety.
  • General Motors' sales look decent despite the recent controversies, and the company's vehicles are being recognized for their quality.
  • General Motors is making solid moves in the emerging markets, where it can provide tough competition to Ford.
  • General Motors' valuation is quite attractive and better than Ford, making the stock a good buy on the drop.

General Motors (NYSE:GM) is in a soup this year. The automaker's shares have declined more than 10% as various controversies and investigations have surrounded it. In comparison, rival Ford (NYSE:F) is on a roll this year, with shares up over 10%.

General Motors' woes are a result of a recall of 20 million vehicles, after it was revealed that faulty ignition switches led to deaths and injuries of its customers. CEO Mary Barra has been at the center of Congress' hearings, and events like these have hurt the auto company. However, looking beyond this smoke, is there any chance that General Motors might improve in the long run? In simpler words, should investors take advantage of General Motors' weak share price to add more shares to their portfolios? Let's check.

Improving quality control

GM is trying to repair its image, and the main objectives behind its recall are to repair the cars as quickly as possible so that the company can win back the full trust and confidence of its customers, regulators, and other stakeholders.

Although the recent recalls by the company have spread negative publicity and slowed its momentum in the United States, still it continues to be optimistic about 2014 because its award winning new products are performing well. The U.S. customer service index study by JD Power has ranked all four GM brands above the industry average in 2014.

GM has also simplified its product development leadership structure to remove side loads and complexity. In January 2013, it launched a comprehensive program to retool its product quality and durability validation process.

Also, GM has created a Speak up for Safety program that was launched in May. Speak up for Safety recognizes employee ideas that could make its vehicles safer. It also plans to recognize them for speaking up when they see something that could impact customer safety. The program is designed to include a global 24/7 hotline and a micro site dedicated to vehicle safety. This is expected to provide a direct access to GM safety organizations and its problems-tracking system to ensure a closed-loop reporting and review process.

GM also rolled out fundamental changes in the way it develops vehicles. Going forward, the global vehicle engineering organization will consist of global vehicle components, a sub-systems team, and a global product integrity team. The main objective behind this is to improve cross systems integration and deliver more consistent performance across vehicle programs and ensure functional safety and compliance of all its vehicles.

Decent sales numbers

Despite the negative publicity that GM is facing, its sales numbers are decent. For example, during the first quarter, GM delivered 2.4 million vehicles around the world, an increase of 2%. Sales of GM in Europe increased, and it also delivered record sales in China. However, the company did see weakness in North and South America. As a result, the global market share of GM was 11.1% in the first quarter, a decrease of two-tenths of a point, from the year-ago quarter.

But, more importantly, GM gained one tenth of a point of market share in China, driven by the growth of the Cadillac brand and the success of the Buick and Wuling brand. So, GM is making progress in a key emerging market in China.

Buick and Wuling performed well as Cadillac sales more than doubled. Sales growth at Chevrolet is expected to accelerate with the introduction of a Trax Crossover, which will be launched this quarter. The Trax is considered to be an essential product offering, with Crossover and SUV demand in China expected to grow at about a 10% annual rate to reach about 7 million units by 2020.

The Trax can help GM gain in emerging markets

However, GM will face stiff competition from Ford in this market. Ford already has a head start in the crossover market with its EcoSport SUV. In 2013, Ford's sales in China increased nearly 50%, primarily driven by the EcoSport SUV, which sold close to 60,000 units. In addition, Ford has also made a big mark in a key emerging market such as India with the EcoSport SUV, delivering more than 50,000 units last year. In fact, Ford had to halt bookings for the vehicle due to high demand.

Now, Ford has recently started bookings for the EcoSport once again. However, the company has also hiked prices of the product in India, and this might lead to a drop in sales and popularity of the SUV. As such, if GM launches the Trax in India as rumored, it might be able to get off to a good start by capitalizing on Ford's price hike.

So, there's a probability that General Motors will be able to improve its sales in emerging markets such as China and India further by introducing the Trax crossover. In addition, from a valuation point of view, General Motors looks like a good buy right now.

Valuation

GM trades at a trailing P/E ratio of 19, which is way more than Ford's multiple of 10. However, on a forward P/E basis, GM is the better buy at a ratio of 7.7, while Ford has a ratio of 8.7. Moreover, GM's PEG ratio of 0.53 is way better than Ford's 1.00. Finally, according to analysts, GM's earnings are expected to grow at a CAGR of 22% for the next five years, while Ford's earnings expected growth rate is just 12.6%.

So, investors should consider capitalizing on GM's drop and buy the stock for the long run as it is trying to improve quality control and seeing good traction in the emerging markets.

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

Source: 4 Reasons Why Investors Should Buy General Motors On The Drop