The auto industry is a cyclical industry that has dragged down many investors’ portfolios over the years. However, the U.S. auto manufacturers have improved significantly as a result of housekeeping done during the financial crisis and subsequent recession.
General Motors Company (NYSE:GM) is the most-improved auto manufacturer as a result of its restructuring and it also has the most upside left in its stock.
Lower Costs
General Motors Company (NYSE:GM) was able to restructure its pension plans and negotiate a more favorable contract with the United Auto Workers. These two important measures drastically reduced the company’s costs, which has enabled it to be profitable at volume levels that would have left it in the red just a few years ago.
In addition, new management has announced its intention to reduce its vehicle platforms to just 14 by 2018. This will further reduce the company’s cost structure and lead to higher margins.
Better Future
The company’s lower cost structure has enabled it to spend more money designing better car models and expand overseas.
General Motors Company (NYSE:GM) has a significant growth opportunity in China. Despite rising incomes and economic prosperity, Chinese citizens own only a small fraction of cars as those in the U.S. on a per capita basis. This difference is expected to narrow as Chinese auto demand is expected to outpace U.S. demand over the next few years.
General Motors is protected from a downturn in the U.S. due to its strong balance sheet and vast international operations — over 70% of its sales volume come from overseas.
Finally, new management has put an emphasis on profitability — not market share. The new General Motors will now focus on putting more cash in shareholders’ pockets rather than fighting tooth and nail for market share.
Detroit Still Not Immune to Foreign Car Manufacturers
Despite a better outlook for all U.S. car manufacturers, they are still subject to intense pressure from overseas competition.
Ford is now investment-grade credit that is growing its dividend. It has a solid line of fuel-efficient vehicles that have been able to compete with traditional eco-powerhouses Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC).
But both Ford and General Motors Company (NYSE:GM) have been losing significant market share to foreign automakers for many years. This trend is expected to continue as long as the U.S. dollar remains strong relative to other currencies.
Honda’s share of the U.S. auto market is growing quickly and is expected to do so for the foreseeable future. Its models have traditionally been more popular than Ford and General Motors’, which allows it to sell its vehicles without using profit-killing incentive packages.
However, a weak U.S. dollar will make Honda’s vehicles more expensive for U.S. consumers, so low interest rates will continue to benefit U.S. auto manufacturers — especially if Japan is unable to spur inflation in its own economy.
Valuation
General Motors Company (NYSE:GM) trades at around 10x TTM earnings. However, the company could easily earn $4 per share in 2014 if the global vehicle market continues its recovery. If the company earns $4 in 2014, then the stock is trading at just 7x 2014 earnings. This is a ridiculously-low multiple for a much-improved company that is now focused on profitability instead of top-line growth.
The article This Post-Crisis Carmaker Is on the Brink of Rapid EPS Growth originally appeared on Fool.com and is written by Ted Cooper.
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