by Vinita Basu
General Motors' (GM) brands include Buick Chevrolet, GMC, Opel, Cadillac, Daewoo, Holden and Vauxhall. Its total revenue accrued from vehicle sales worldwide amounted to nine million during the year ended December 31, 2011. According to the company's latest earning figures, GM surprised the market with a sales growth of 10.8% and an income growth of 62.5%.
As an organization, General Motors is making progress in North America and this is attributed to a rise in fuel prices which has inspired replacement of aging motor vehicles with modern fuel efficient versions. However, many competitors are also taking advantage of that growth through aggressive discounts and other incentives. The company enjoys robust sales and annual revenue of about $151.84 billion, which surpasses most of its competitors. It also has one of the best operating margins of about 5.2%, amongst the large companies in this industry. The net income of the company has also achieved a turnaround after the reverses during the recession of 2008 and currently stands at about $5.44 billion.
One of the factors that favors General Motors in this sector is its low price to earnings multiples. With a P/E ratio of about 6.62, the company betters the Industries' average of 12.61 by quite a margin. It also has one of the lowest price/ earnings to growth ratio of 0.48, thus being an attractive growth story for long-term investors. Further within the industry, General Motors is one of the organizations which has shown positive growth in its business over the last one year or so, wherein other major competitors have failed. In fact, one of the greatest investment wizards, Warren Buffett, has also recently bought a $10 million share stake in the company, a move which can be construed as a major positive for the stock.
However, for General Motors, Europe continues to be an Achilles heel due to the ongoing European financial crisis. The company' first-quarter financial report shows that GM's European business has suffered a loss of $256 million as compared to the $5 million profit accrued a year ago. The incoming revenue from its European division also showed a 20% drop. As a result, the company earned only $1.0 billion in comparison to $3.2 billion earned a year back. Thus, the per-share earning was only $0.60, a definite down from $1.77 earlier. But even then the results were better than the predictions made by most analysts.
Comparatively, the revenue from North America was better by $1.6 billion, having touched $37.8 billion. This is why the company's mainstay is North America, where profits have risen to $1.7 billion from $1.3 billion over a period of time. This is accompanied by an increase in profit by 39% to $181 million, as shown by its financing business. Of late this company has also been focusing on China as its potential growth area. This has resulted in an increase of sales in that country over the past years. There are also reports that the company is proposing to take a one-third stake in the Japanese auto major Isuzu (ISUZF.PK).
General Motor's competitor, Ford (F), on the other hand, has better sets of statistics as far as its financial figures are concerned. It has an extremely low P/E of 2.15, thus making its valuations ideal for investment. The price/earnings to growth ratio is also extremely low at 0.83, but higher than GM's 0.48, indicating good growth prospects albeit a tad slower than General Motors. Ford has also been focusing on China. It has set up an assembly plant and is likely to enhance its production capability by almost double due to increased demands. However, Ford posted a sharp 20% fall in profits to $1.6 billion vis-à-vis $2.0 billion during the first quarter of the year in 2011. This decline is much steeper than the one that General Motors reported. Hence, the earnings for the next quarter are to be watched prior to committing oneself for investing in this company.
Another General Motors competitor to watch out for is Toyota (TM). This company has been recovering from recalls and natural disasters in Japan and Thailand that had beleaguered it in the past. It has commenced marketing new models of fuel-efficient cars like Corolla and Prius Hybrid. Not only is it expected to forecast profits in the coming quarters in excess of General Motors' expected earnings, but has managed to beat analysts' forecasts by improving its margins and volumes for fiscal year 2013. Analysts expect the company to improve its net profit next year by as much as 200% as it is in the process of overcoming the aftermath of the Japanese earthquake, and tsunami and floods in Thailand last year. However, the valuation of the yen vis-à-vis that of the dollar is likely to make a dent in Toyota's profits. The current valuation of the company is also very steep, with its trailing twelve month P/E of 34.68 against an industry average of 12.61. Hence, in my opinion, even though Toyota looks like a good prospect for future investments, at current levels the stock is expensive and General Motors is a better bet.
Honda (HMC) is another highly competitive company in this sector. This company enjoys tremendous brand reputation due to its strict quality control and worldwide presence. It too has had its bit of suffering due to the natural calamity in Japan and Thailand. The recovery of the company from the same is still underway since the others have captured its market during this period. Currently, the company is trading at a relatively high valuation with a price to earnings ratio above 21. However, the common stock prices of the company are extremely stable within the industry, having a beta as low as 1. The company has a low operating margin of 2.93% as against 5.21% and an operating cash flow of $9.3 billion compared to General Motor's $11.04 billion. Hence, the financial ratios currently favor an investment in General Motors rather than Honda due to higher profitability of the former, which in turn implies higher growth and an increase in wealth generation for investors.
Tata Motors (TTM) is another interesting bet in this industry. As far as its market capitalization is concerned, this company is small when compared to the big giants in this industry but is showing a great promise. Having a market capitalization of just $15 billion, the stock has been subject to a higher volatility. However, the company's price to earnings ratio of only 9 is better than both the Japanese majors, Toyota and Honda. It has had a major acquisition in the past in the form of Jaguar Land Rover for a sum of $2.3 billion, which has seen a turnaround and is currently driving its sales worldwide. The company's leadership has been outstanding and has focused its sales in the world's two most populous countries - China and India. However, in the first quarter of 2012, the sales figures of its vehicles were reported to be lower. Further, the weakening of the European economy and its imminent recessionary trends may impact the company more than others in this industry, due to its highly leveraged position due to the JLR acquisition. Therefore, in my opinion, though Tata Motors has a promising future, the performance of the company should be carefully studied over another four quarters before making any investments.
Going forward, General Motors, being one of the most trusted names in the American household, is sure to capitalize on the increased confidence which is now evident in the market. Thanks to recent innovations and economic turnaround, the sales of motor vehicles are expected to surge henceforth. The operating margin for this industry is currently very low owing to the ongoing financial crisis the world over. But the situation is likely to reverse very soon and this is sure to benefit the industry as a whole and General Motors in particular. The revenue and profits are likely to balloon in the near future and in my opinion, investors with a long-term horizon should include this company in their portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.