General Motors And Peugeot Discuss 'Sharing'

Feb.24.12 | About: General Motors (GM)

General Motors (NYSE:GM) is really searching for a way to fix its European operations and get more competitive in the compact car division. This week it was confirmed by the French Labor Minister Xavier Bertrand that General Motors and PSA Peugeot Citroën are in discussions for a potential alliance. The Cruize in the United States has been a good hit (it is light years ahead of the Cobalt and Cavalier), and has helped stabilize General Motors' market share in the United States. However, General Motors is hemorrhaging money in Europe, and aligning itself with the second largest (by volume) automaker in Europe, PSA Peugeot Citroën, behind Volkswagen, seems like a good place to start.

The rumors circulating are not for a full-fledged merger or acquisition, but more of a sharing of sorts. It is similar to the deal announced by Ford (NYSE:F) and Toyota (NYSE:TM) where both companies would share in the research and development costs for small cars as well as new hybrid technologies. It doesn't seem that GM and Peugeot are going after the hybrid market as much as the small compact car market. GM still has not fixed its European operations. During the most recent quarter, GM announced earnings (excluding items) of $0.39 per share, below the Street's $0.41 per share forecast. However, North America added $1.5 billion to its quarterly profit, while GM Europe lost more than $600 million during the past three months.

I can clearly see the benefit for PSA Peugeot. Peugeot sells 3.5 million vehicles annually, with more than 50% of its sales coming in Europe. However, this deal will open up Peugeot to a truly global marketplace. However, I have yet to see what GM will be getting out of this deal, besides maybe some improved smaller car technology. Initially, when I read the rumors about GM and Peugeot, I instantly thought that both companies were trying to mimic Sergio Marchionne and Fiat's "investment" in Chrysler. Peugeot already has a partnership with BMW AG to jointly develop a lower-emission engine for some of its most popular models. While Peugeot has also worked with Mitsubishi Motors on product development on SUVs, clean technologies with electric vehicles, and a joint venture in Russia. This deal with GM is expected to dwarf both strategic alliances.

So is GM thinking outside the box with respect to Opel and Vauxhall or is it simply a last ditch effort to try to pawn some of the huge costs onto someone else? Since the middle of December 2011, GM's shares have been on a nice rebound, but then again so has the market. The results posted last week were strong in that General Motors posted another quarterly (and annual profit) but there were many red and yellow flags scattered throughout the release that makes me second guess the 40% move the stock has seen over the past two months. On top of the fundamental problems for the stock, you also have the fact that the U.S. government still owns more than 500 million shares of the General Motors (approximately 30%) and any real hope for capital appreciation becomes a pipe dream. For the government to be made whole for its investment in General Motors, shares have to appreciate to $53. As more time passes, the risk becomes even greater that the government will just liquidate its holdings and cause the stock to fall, thereby taking a loss on its investment, but finally getting out of the auto industry.

So if one was really looking to invest in the auto industry, and capitalize on the strength of U.S. auto sales (remember sales in Europe have held up well considering the economic weakness there, but are expected to fall approximately 5% during 2012), I would prefer an investment in Ford or Toyota . Ford has a higher risk/reward, while Toyota will offer a little less volatility.

Disclosure: I am long F.