Stephanie Link: Still a Solid Case for Beaten-Down GM
The reality is - there are incentives being given out right now, but it's usually pretty typical for the industry to do so around the President's Day Holiday - usually discounts are around 10% to drive store traffic during this seasonally slower period. And, yes, GM is offering $7,000 discounts on certain vehicles but it's not "all" of its products and many are on the older GMC line. Just last week, the company produced a new record in earnings in North America driven by better volumes and pricing. Margins also improved to 7.5% from 5.3% year over year and the company has a restructuring under way that should lead to 10% margins by mid-decade in North America. It also has taken aggressive actions to return to profitability in Europe by mid-2015 and restructuring efforts should also help its cost structure going forward. Not all is perfect, and there is a lot of work that needs to be done in its International operations (although it just reported record earnings in China last week as well) and South America. But down 15.8% from its highs, the stock is discounting a lot of bad news and now yields 3.4%. Plus, free cash flow will reach $5.5 billion this year even with losses seen in Europe, a $1.1 billion restructuring charge and headwinds in its International division. It has aggressive cost cutting efforts under way, has closed unprofitable plants, moved many of its products onto the same assembly lines, and has a new truck line up that should lead to better market share gains. In other words, this is a restructuring story - which should show an improvement to EBITDA, cash flow, margins and market share. The macro is important, but the internal reorganization is also appealing - especially at 8x forward estimates. --Written by Stephanie Link in New York.
Action Alerts PLUS, which Link co-manages as a charitable trust, is long GM.