General Motors Company (NYSE:GM) is now growing thanks to the modest industry recovery and its restructuring efforts initiated following the economic downturn in late 2007. The benefits of the latter should lead to accelerating earnings growth over the next few years and higher earnings power at all points in the auto industry cycle. Product launches, a partnership with Wells Fargo, fixed cost management, dealer network facility upgrades, and pricing and inventory discipline were cited by management as accomplishments in 2012. General Motors Company (NYSE:GM) plans to continue to refresh its product portfolio, and will focus on margins and earnings growth instead of market share gains via price.
GM Repositioned for Earnings Growth
In 2012, management returned GM South America to profitability and started to turn operations around in Europe. It reduced its pension obligations by $29 billion and added an $11 billion revolver to increase financial flexibility. Capex was also up in 2012 to $8 billion. The US bailout was also addressed, and the firm returned capital to shareholders. Its acquisition of Ally International also expanded its GM Financial operations. By 2014, GM will reduce the number of vehicle platforms to further reduce costs.
North America Guidance and Targets
After years of US car and light truck sales far below normalized levels of 15-16 million in annual sales, sales finally rebounded to 14.7 million in 2012. They are expected in continue to grow in 2013. In 2013, General Motors Company (NYSE:GM) guided for North America an increase of 5% in industry auto sales with modest share increases. Management expects little impact form mix, with growth in luxury vehicles offset by growth in small cars. Flat truck sales are expected. The impact of pricing should be favorable, with positive trends in new vehicles only partially offset by negative trends on carryover vehicles. Flat margins are likely, but the sales increase should lead to higher EBIT in FY13.
Management has set a 10% target for its EBIT margin in North America as a mid-term goal. It expects this to come from a mix of product launches, price discipline, and its fixed cost reductions. The latter includes cost cuts in SG&A, global marketing and manufacturing operations. The chart here provides further detail on targets for North America.
GM Rest of World – 70% of Volume
In South America, General Motors Company (NYSE:GM) expects generally positive trends with volumes, pricing, mix, EBIT, and margins all improving. It has targeted mid-single digit EBIT margins. In Europe, the top-line will be negatively impacted by lower volumes and pricing. That said, management expects costs to decline by capacity rationalization, overhead restructuring, and logistic and purchasing synergies. This will lead to higher EBIT and margins in a challenging environment. The cost reduction strategies over the next few years for Europe are in this chart. Management expects to continue to improve margins and profitability through its pricing.
Competitors
Ford Motor Company (NYSE:F), Toyota Motor Corporation (ADR) (NYSE:TM), and Honda are the primary competitors of GM. Until recently, GM suffered share loss to these players resulting from less fuel-efficient vehicles. However, today that is no longer the case. General Motors Company (NYSE:GM) is still the leader in market share, with 17.9% of the global market on a TTM basis. Ford is second with a 15.6% market share on a TTM basis. Toyota is in third place at 14.5% of the global market. This chart has the market share data for the past thirteen months.
Toyota has gained 9.3% in sales this year, while Ford Motor Company (NYSE:F) and GM have gained 5.3% and 3.5%, respectively. In terms of operating margins, Ford and Toyota are quite similar, but GM is far behind. Ford has an operating margin of 4.97% and Toyota has an operating margin of 4.82%. GM is at 1.88%.
Conclusion
GM, in recent years, has traded within a range of 9x – 11x trailing earnings. Street consensus for FY13 earnings is $3.40 (up from $2.92), and $4.37 in FY14. If General Motors Company (NYSE:GM) can execute on its margin improvement plans, industry trends are likely to be favorable for GM. It should benefit from a recovery in North American volumes, growth in South America, and continued growth in China. While European demand will soften from already relatively low levels, GM’s cost savings plans can still lead to EBIT growth in Europe. If you are looking to own an auto stock, GM is may have the most upside.
The article Comeback Time For This Auto Company originally appeared on Fool.com and is written by Mike Thiessen.
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