GM Drives To $24 By Fixing Its European Business

Sep. 2.12 | About: General Motors (GM)

General Motors Company (NYSE:GM) isn't the only automaker which is struggling to contain its European losses. GM's Q2 European losses stood at $361 million, a rise of more than 40% from the previous quarter. The stock is down 20% from highs of $27 earlier in February 2012 as Europe continues to erode GM's value. Besides GM, other automakers such as Ford Motors (NYSE:F), Fiat and PSA Peugeot Citroen are all embroiled in the European mess.

Sales of GM's brands in the region, comprising of Opel and Vauxhaull, are down 15% in the first half of 2012. The automaker's declining sales in the region aren't enough to cover for the high operational costs, which remain relatively constant irrespective of the sales figures. Strong labor unions and government pressure has made it increasingly difficult for automakers to cut jobs or close plants in the region.

However, GM's recent development in the region could be a harbinger of better things to come for the automaker in the coming quarters. Firstly, the automaker has been able to strike a deal with labor unions which will allow it to halt production for as many as 20 days between September and December this year. The agreement will help GM cut costs in the short term.

Secondly, GM plans to shut at least one of its plants in Europe by 2016. One of the biggest reasons why GM continues to lose money in Europe is because of overcapacity. Currently, it only produces 66% of its capacity in Europe. Thus, a plant closure would help bring down the costs meaningfully in the long run.

GM has taken some additional initiatives to alleviate its Europe concerns, but we will have to wait to see how effective these moves will be. One such move is that GM appointed restructuring consultant Thomas Sedran as the interim CEO of Opel and forging an alliance with French automaker PSA Peugeot Citroen through which the two automakers hope to save $2 billion annually.

Other steps taken to address its European image is a sponsorship agreement with soccer giant Manchester United estimated at $600 million. The deal might help improve GM's brand image in Europe, which is seen as a generation behind and not considered attractive enough for the region's young population that is more inclined toward the European, Japanese and Korean automakers.

We currently have a Trefis price estimate of $23.60 for General Motors's stock, which is about 10% higher than the current market price.

Disclosure: No positions