Improving economy in the U.S.
Auto sales in the U.S. have been on the rise since the beginning of 2013 as the economy gets back on a growth track. Consumer spending is constantly improving in the country, leading to higher demand for big-ticket items. According to the data, May was the best overall sales month for General Motors Company (NYSE:GM) since the meltdown in 2008. GM’s first quarter results were almost flat, with net income at $0.9 billion compared to $1 billion in the previous quarter. The rising recession in Europe is still hurting the revenues of the global automakers, with car sales going down every month.
Cash position needs improvement
While the company’s financial results were pretty much flat, cash flow for the quarter appeared to be an area of some worry. Automotive net cash was $500 billion in the quarter, a decrease of $1.8 billion from the same period last year, whereas the automotive free cash flow was a negative $1.3 billion. The management attributed this cash flow anomaly to a production timing issue that generally persists in the first quarter. Also, an increase in capital expenditure and a slight decline in the revenue adversely affected free cash flow. I believe this will reverse in the remaining half of the year as auto sales improve globally. On top of that, there will not be timing issues related to production, which will ease the pressure on cash flows.
Reviving Cadillac
Cadillac as a brand is crucial to General Motors Company (NYSE:GM) at this stage. In the first quarter, Cadillac’s sales increased 38% year-over-year in the United States. A major portion of GM’s revenue has been coming from the sale of trucks and SUVs across the globe, which has prompted CEO Dan Akerson to revive Cadillac as a luxury brand. GM currently does not have a defined collection of cars in the luxury segment like say, Volkswagen’s Audi or BMW’s 7 series, and as a result of which it lags behind its competitors in terms of profits (since luxury cars are high-margin products.)
Running for the premium segment
In order to narrow down this gap General Motors Company (NYSE:GM) has launched a range of new Cadillac sedans, which include a compact ATS, a full-sized luxurious XTS, and a more sophisticated version of the ATS called the CTS. GM’s aim is to position Cadillac as a premium brand in major markets like North America and China, which are huge markets for status cars. China is a big battleground for the automakers because of a robust economy and reasonable consumer spending. Ford Motor Company (NYSE:F) , a major rival to General Motors Company (NYSE:GM), increased its sales by 45% in the month of May with the Focus being its top-selling car.
Competition is fierce
Luxury cars are high-margin products because of a huge price-cost gap that results from economies of scale in the production of certain components. As such, automakers are jostling to command this space. Ford Motor Company (NYSE:F) is now spending more than $1 billion in order to revive its premium Lincoln brand and enter the market. The company has maintained its guidance in markets like North and South America after good first quarter results. Europe will continue to remain a challenging market for the company, which expects a loss of $2 billion in the region. It has a price-to-earnings ratio for the trailing twelve months of around 10, which is slightly lower than the industry average of around 12. In my opinion, it is a good investment option considering its consistent sales growth and the improving global economy (with the exception of Europe).
