It's Not Time To Give Up On GM Yet

Nov.25.11 | About: General Motors (GM)

The US government still owns 26.5% of GM, around 500 million shares, and rendered $49.5 billion in aid in times of need. GM is one of the biggest global automotive companies, after Toyota, Volkswagen and Honda Motors. But that doesn't really help, when the US government is all set to renew and bowdlerize the economy standards of cars and pickup trucks by the year 2025.

With the volatility over energy resources and concerns over environmental hazards, there has been increasing pressure on automotive companies to redevelop their manufacturing processes and cook out vehicles that will save consumers over $4,400 in fuel savings per year alone.

But the fact is, it is not that easy to achieve this benchmark, which will probably increase the cost of production by an extra $2,000, which can either cut into the bottom line, or lead to higher prices of the cars and trucks -- a catch-22 situation indeed in this depressed economy.

Here, we are going to focus on how it's going to affect the General Motors in the future. GM's net income margin of 4.67% is better than Toyota's 1.4% or Nissan's 4.64%, and is more or less in par with Ford's 5%. There is something interesting to note here. Ford, one of the most competitive rivals of General Motors, has been inclined more towards full-size pickup trucks, rather than mid-size pickup trucks. And keeping in mind the rising gasoline costs and maintenance charges, it might be a wise move on the part of Ford.

Before we comment further, let's take a look at GM's third quarter report. Dan Akerson, chairman and CEO, said:

GM delivered a solid quarter thanks to our leadership positions in North America and China, where we have grown both sales and market share this year. But solid isn’t good enough, even in a tough global economy. Our overall results underscore the work we have to do to leverage our scale and further improve our margins everywhere we do business.

If you ask me, it doesn't look that impressive to me. Total revenues in the last quarter increased by $2.6 billion to $36.7 billion, over the year-ago quarter. Though it must be noted that the net income still dropped to $1.7 billion from $2 billion in the year-ago quarter. Total earnings before interest and tax (EBIT) dropped to $2.2 billion from $2.3 billion in the year-ago quarter, with the downturn in South America and other international locations worldwide, and a loss of around $0.3 billion in Europe.

Though things are going good in North America, it doesn't really sound too good to me at the moment. And worst of all, the company doesn't even promise a better fourth quarter this year, which is attributable to depressing conditions in Europe and seasonal trends in North America.

Let's take a look at the 2010 annual report. Here's something interesting that we get from the annual report. Market share of the Chinese joint ventures (JVs) actually gone down to 12.8% last year from 13.3% in 2009. Isn't this contradictory to the phrase "leadership position" in China mentioned above?

While total sales and revenue increased to $135.6 million in 2010 from $57.5 million in 2009, operating income improved to a profit of $5.08 million from a loss of ($4.9) million in 2009, which is tremendous news for the investors. The company was hit badly during the Great Recession and it is slowly reviving over time.

Looking at the balance sheet, sales have gone up, and so did the inventories. Company is using up the stagnant cash more and more in marketable securities, perhaps to reap some profit for other short-term investments. Moreover, intangible assets, assets held for sale and equipments on operating lease have gone down, which proves the fact that the company is in an overhauling process. But here are a few things that might actually change your mind about the company.

The company announced plans to reduce leverage by about $11 billion, with the repayment of outstanding $2.8 billion on the 9% secured notes provided to UAW Retiree Medical Benefits Trust, along with the completion of a $5 billion, 5-year revolving credit facility from a syndicate of banks. Just as I thought, the company management is on its way to get further credit and pulling up the business.

Moreover, there is a plan of a purchase of the $2.1 billion 9% Series A preferred stock held by the US Treasury Department. This will free up a lot of cash for the company to be utilized in future investments. And few days back, the company commenced a public offering of 478 million common shares at $32-$33 per share, and 60 million Series B compulsory convertible junior preferred shares with liquidation value of $50 per share, which are worth around $13 billion. So, what's going on here?

I would say, more and more green paper is probably coming to the company, which might turn around the company's future. Now, some say that public offering might be the last step to the liquidation of a company. I am an optimistic person and my logical common sense says, it's better to hold till 2012. What do you think?

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