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In recent months, shares of General Motors (NYSE:GM) have fluctuated rather violently as investors try to weigh the risks of GM's money-losing European Opel division against strength in North America. While Opel faces a rocky road back to profitability, strength in North America is far more important to GM's overall results. As a result, the stock has significant upside into the low $30-range over the next few months.

On Thursday morning, GM reported U.S. sales of 209,306 units for February 2012. This represents a 1.1% gain year over year. While this may seem like anemic growth compared to Ford's (NYSE:F) 14% advance, GM still has a comfortable lead over Ford, which sold 179,119 vehicles last month.

However, the real story was that GM was able to keep sales steady even while reducing incentive spending from 13% to 9.5% of average transaction prices. This will provide a significant boost to GM's margins in the first quarter. Analysts are currently modeling Q1 EPS of 81 cents, which implies a 15% decline from last year's adjusted EPS of 95 cents. These profit estimates are likely to rise in light of GM's strong February performance.

It is hard to predict how overall profitability will be affected by Europe in the short-term, as the macroeconomic situation there is very unstable. The major piece of recent news is GM's decision to form a development and purchasing alliance with Peugeot and buy a 7% stake in that company. While most analysts have taken a skeptical view of the alliance, I believe it is a good interim step for restoring Opel to profitability.

Analysts clearly are hoping for capacity cuts, but based on GM's European labor agreements, it seems unlikely that such cuts will be possible until after 2014. That said, GM management has been laser-focused on lowering Opel's break-even point, so I expect to see at least two plant closings in Europe when the current agreement runs out. The Peugeot deal should have no impact on those plans. In the meantime, GM's goal is to limit the damage and prepare for right-sizing the business around 2014.

I agree with John Rosevear that the Peugeot alliance may actually help pressure Opel's unions to make concessions. The biggest reason why GM decided to keep Opel a few years ago was to maintain global scale. With a Peugeot alliance sealed up, GM could credibly threaten to make deep cuts at Opel (or even to liquidate the company). This may be exactly the sort of bargaining chip GM needs in order to make Opel competitive once again.

GM's European troubles may continue, but the company's 6X earnings multiple already accounts for that risk. With strong performance in its core U.S. market and a solid product pipeline, GM has significant upside from recent levels. I rate the stock as a strong buy.

Disclosure: I am long GM.

Source: Don't Fear Europe - Buy The GM Juggernaut