General Motors is the most speculative stock in my current portfolio. While General Motors beat the estimates of the street for the 2nd Quarter, this is a turnaround situation that has "iffy" chances of success. There are many factors that must go right in order for the company to be successful in its turnaround. Some of these factors are out of the control of management of GM.
First and foremost GM must have successful negotiations with the United Auto Workers (UAW) this summer and fall. If the negotiations fail, GM as we currently recognize it may no longer exist in just a few years. Even if negotiations are successful, the WSJ reports that the company will be worth nowhere close to its current $18B market capitalization.
It may well be that if a successful agreement is not reached with the UAW, General Motors could close many if not most of its plants in the United States and Canada and begin to import vehicles from facilities overseas. The Chevy Aveo, manufactured in South Korea, is just one example of this going on already. GM could expand its facilities in Asia and Mexico to import vehicles into the United States. Even with a successful UAW agreement, GM may take this path to reduce costs.
Other factors such as rising oil prices, rising interest rates, the housing debacle, the unstable geopolitical situation, the risk of another major terrorist attack on the United States are obstacles that GM is facing as it implements its turnaround.
It appears that GM management, let by Chairman CEO Richard Wagoner, understands that the status quo must change in order for GM to remain solvent. GM has cut costs by closing plants, buying out workers, and reaching a successful agreement with the UAW at Delphi. GM has raised cash by selling off assets such as 51% of GMAC last year and is currently in the process of selling off Allison Transmissions (a very profitable high margin subsidiary).
Many make sound arguments that cost cuts and the selling of assets are just Band-Aids that will not cure what ails GM. General Motors must look boldly into the future in order to be remain solvent. Fortunately for the long term investor, GM is doing just that. In the 2nd Quarter, more that 50% of revenues came from outside of North America. GM has a great presence in China. Buick is the number one nameplate among imports in China. Buick is considered a car of the elite in China, much as Cadillac is considered in the United States. While numbers are small, GM has had success in India. General Motors is expanding its presence in Malaysia and Indonesia, possibly even manufacturing there in the future.
According to the Wall Street Journal, GM's North American operations had an adjusted profit of $78 million for the 2nd Quarter turning around an adjusted loss of $94 million a year before. Net sales fell to $29.57 billion from $30.85 billion. GM Europe posted adjusted net income of $236 million, up from $143 million a year earlier. Net sales rose to $9.56 billion from $8.74 billion. Net income on an adjusted basis at GM Asia Pacific rose to $237 million from $164 million. Sales climbed to $5.45 billion from $3.78 billion. GM Latin America had adjusted earnings of $213 million, compared with $155 million a year ago. Sales rose to $5.45 billion from $3.78 billion.
Because foreign profit margins are so thin, GM must look to North America for long term profitability according to Standard & Poors. GM is currently making large capital expenditures in technology. The leadership at General Motors realizes that it can not afford to wait to see what others such as Toyota are doing. GM must take the lead with new technology. According to Bloomberg, the Chevrolet Volt concept plug-in car has twice the range of that of Toyota's plug-in car (See full article at Bloomberg). The Chevy Volt battery can be charged on a household outlet. The car uses an engine to generate electricity when the battery runs down. This engine may be powered by gasoline, diesel, or by groundbreaking technology hydrogen fuel cells. The engine only recharges the batter and does not power the drive train. One tank of gas could carry the Volt as far as 640 miles.General Motors is taking a big risk here. It is comforting for the long term investor to know that CEO Rick Wagoner has the largest sharecount among insiders at 400,000 shares. Wagoner appears to be committed to returning General Motors to long term sustainable profitability.
All that being said, Warren Buffett has stated in past that he would not invest in the auto industry. Companies such as General Motor require tremendous amounts of capital, huge amounts of long term debt and typically very slim net profit margins. The automobile industry is very cyclical, continually going from periods of boom to bust.
Many investors are betting that GM will not be successful. Currently the stock has a short interest of 11.92% of shares outstanding (over 57 million shares short).
Although the stock has risen substantially over the past 12 months (almost 30%), make no mistake, General Motors is a very risky investment for a short term and a long term investor. Earnings are all over the board, sometimes very positive as the past quarter and at other times huge negative surprises.
At this time the risk is worth it to me personally. I opened my original position in GM in January 2007. I have added to my position twice since them. Even with the large market plunges of the past several weeks, I am still up almost 4% in General Motors.
As an amateur investor I can not make a recommendation for you to invest in General Motors. I can recommend that you do your own research on the company and make your own decision on whether you can tolerate the high risk of owning this stock. If GM is successful in its quest for cutting edge battery power and fuel cell technology, the GM of the future could be very different and much more profitable than the GM of the present.
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