GM Stock Declines Following Price Cut Announcement as Chinese Sales Lag

NEW YORK (TheStreet) -- General Motors (GM) shares are down 1.5% to $34.69 in trading on Tuesday after the Michigan-based automaker cut prices in China on 40 vehicle models due to flagging sales in the country.

GM said that it will cut prices by as much as $8,700 on vehicles from its Buick, Chevrolet and Cadillac brands, joining other foreign automakers who are slashing prices in an effort to capitalize on the burgeoning car market in Southeast Asia. The company reported a 5.6% drop in April Chinese Chevrolet deliveries, while Buick deliveries fell by 8.5% last month.

China's vehicle market grew by 24% annually between 2005 and 2011, according to a McKinsey and Co. report, and while growth is expected to slow to 8% annually for the next five years, the Chinese car market is expected to surpass 22 million vehicles annually by 2020.

Late last year GM announced plans to invest up to $14 billion in the country by 2018 as it looks to open five new assembly plants in an effort sell 5 million vehicles per year in the country.

Separately, yesterday GM announced that the death toll related to its faulty ignition switch recall last year has reached 100 people. The fund set up by the company to review ignition switch injury claims still has 626 applications left to review out of over 4,000 that were submitted during the eligibility period between last August and January 31 this year.

Last month, the company announced that it is raising the estimated amount of its recall related injury compensation fund to $550 million from $400 million.

TheStreet Ratings team rates GENERAL MOTORS CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate GENERAL MOTORS CO (GM) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, impressive record of earnings per share growth, notable return on equity and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Automobiles industry. The net income increased by 343.7% when compared to the same quarter one year prior, rising from $213.00 million to $945.00 million.
  • GENERAL MOTORS CO reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, GENERAL MOTORS CO reported lower earnings of $1.64 versus $2.35 in the prior year. This year, the market expects an improvement in earnings ($4.48 versus $1.64).
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Automobiles industry and the overall market on the basis of return on equity, GENERAL MOTORS CO has outperformed in comparison with the industry average, but has underperformed when compared to that of the S&P 500.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 6.6%. Since the same quarter one year prior, revenues slightly dropped by 4.5%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • Even though the current debt-to-equity ratio is 1.33, it is still below the industry average, suggesting that this level of debt is acceptable within the Automobiles industry. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 0.79 is weak.
  • You can view the full analysis from the report here: GM Ratings Report
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