General Motors Stays at Neutral

On Dec 16, 2013, we reiterated the Neutral recommendation on General Motors Company (GM).

Why the Reiteration?

GM is focusing on the emerging markets, particularly Brazil, China and India, to expand global sales through increasing capacity investment for meeting growing demand. In North America, GM aims to boost market share, raise vehicle pricing and enhance profit margins to 10% over the next three or four years, from 8%. Meanwhile, the company has targeted break-even results in Europe by 2015.

Further, General Motors is investing significantly in the development of fuel cell technology. The company also sold its entire stake in Ally Financial Inc. and PSA Peugeot Citroen.The capital release will improve the financial flexibility of General Motors. In Sep 2013, credit rating agency Moody’s Investors Services raised General Motors to investment grade on the back of expectations that the automaker’s competitive strength and credit metrics will keep improving.

Moreover, in Dec 2013, the U.S. Department of Treasury completed the divestment of its entire stake in General Motors. General Motors believes that the exit of the U.S. government from the company will enhance its sales, as some of the customers, specially the pickup truck buyers, did not like government interference.

However, GM’s total debt increased to $32.1 billion as of Sep 30, 2013 from $16.1 billion as of Dec 31, 2012. Consequently, debt-to-capitalization ratio hiked to 46.6% as of Sep 30, 2013 from 30.7% at the end of 2012. Moreover, the company’s operating cash flow and free cash flow are declining.

Further, the strengthening of U.S. dollar against most of the major currencies in countries where GM operates is affecting the company sales.Thus, we are maintaining a Neutral recommendation on the stock.

Other Stocks to Consider

General Motors currently carries a Zacks Rank #3 (Hold). Better-ranked major automobile stocks worth considering are Fuji Heavy Industries Ltd. (FUJHY), Ford Motor Co. (F) and Honda Motor Co., Ltd. (HMC). All these stocks hold a Zacks Rank #2 (Buy).

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