In the investment world, patience is not always a virtue when dealing with the motor vehicle market. With an upto 15 percent swing in share value over the period of a few months for certain auto makers, investors have been required to think on their feet when determining whether to buy or sell in this highly volatile market. Although this type of mentality has been the name of the game recently, there are plenty of reasons to believe that patience will once again be in style for General Motors Company (NYSE:GM) for the remainder of 2012.
The last two months have been rocky as General Motors saw its value drop around 16 percent from the end of May to the end of July. Although it has made some progress since reaching its 52-week low of $19 in December 2011, General Motors is a far cry away from the rapid growth it saw in the beginning of 2012 when its share price experienced a nearly $9 increase from January to February 2012.
In weighing the current risk/reward options surrounding an investment in General Motors, it is difficult to tell exactly where it will go in the short term. There are positive signs that point to General Motor's current share price, which sits at around $20, as being substantially discounted. But with the good news, such as record-breaking Chinese growth, comes an equal amount of disconcerting news such as the multi-billion dollar lawsuit recently filed that may have far reaching effects on General Motor's overseas profitability.
With the mixed bag of news, there simply is not enough evidence for General Motors investors to do anything, but sit back and wait for the U.S. fourth quarter reports to clear the ominous clouds that loom over its current position.
General Motors' Identity is being Challenged in a $3 billion Lawsuit
General Motor's sale of Saab in February 2010 was a necessary move for General Motors to regain its profitable status. In 2010, it was reported that General Motors had earned $4.7 billion, the most it had earned in over 10 years.
But it has been recently reported that Saab's purchaser, Spyker Cars N.V. (OTC:SPYKF), has filed a suit against General Motors, alleging that it unlawfully thwarted a deal between Spyker and a Chinese investor that would have revived Saab instead of forcing it to file bankruptcy in December 2011.
In seeking over $3 billion in damages, Spyker has alleged that General Motors never intended to allow Saab to succeed and that its intention was instead to eliminate its competition.
Although General Motors has denied any liability in the action, this suit may be troubling for investors. If the claim against General Motors proves to have substantial merit, General Motors may be forced to go into damage control. This is a position that General Motors can ill-afford, especially in the European market.
The Good and Bad News with Recent Sales Figures
With the pending suit, do not expect European sales numbers to improve anytime soon for General Motors. It was reported that General Motor's European subsidiary had another negative sales report, losing about $361 million in the second quarter.
These recent numbers are yet another contribution to the ongoing struggle General Motors has endured in Europe, as it has reportedly lost $14 billion in the market over the last 12 years.
Although the European sales would cause many investors to flee General Motors, the news coming out of China remains encouraging. It was reported that General Motors sold 199,503 vehicles in July, a 15.1 percent gain from 12 months prior. This record-breaking month has seen General Motors sell over 1.1 million units this year, which equates to an 11.1 percent increase from 2011 sales figures.
With the Chinese giving General Motors a much needed boost that should keep it afloat in the overseas markets, it is my opinion that the direction of General Motors for the remainder of the year will be based on whether U.S. consumers will rally around their own.
With July U.S. sales reporting a drop of 6.4 percent, it is safe to say that General Motors has not started the summer season on the right foot. What is even more troubling is that, while General Motors sales were shrinking, overseas automakers have seen substantial growth. Honda (NYSE:HMC) reported a 45 percent rise in July sales from 2011, while Toyota (NYSE:TM), which is still recovering from the 2011 Tsunami, posted a 26 percent gain.
What makes General Motors performance for the remainder of the year important is that despite its recent declines, it has been reported that overall light vehicle sales have risen 8.9 percent and that overall auto sales are expected to top 14 million this year. If these numbers play out, this will be the best sales year in the United States since 2007.
There is plenty of time for General Motors to make enough gains in the remainder of 2012 to pay its investors substantial dividends. But the speculation currently surrounding General Motors should give investors a reason to pause. Regardless of how General Motors sales turn out, by the end of the year, many of the looming questions will be answered and thus will give investors enough information to toss aside the doubt and transform an investment in General Motors into further profit.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.