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General Motors (GM) Shifts Gears on Strong US and China Sales

By: , dated July 6th, 2012

After plunging under $20 and falling near its 52-week low, shares of General Motors (GM: Charts, News) rebounded this week after both the U.S. and China reported stronger than expected auto sales. In the United States, General Motors posted a 16% increase in June sales, more than double the analysts’ forecast of 7.6%. Its primary domestic rival, Ford (F: Charts, News), also posted a healthy 7.1% gain, also more than double the forecast of 3.5%. Many analysts cut their expectations for automakers going into June, due to sliding domestic consumer confidence, European volatility and the imminent Chinese slowdown. This caused shares of GM and Ford to plunge 10% and 6% respectively by the end of June.

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However, these surprisingly strong results now suggest that despite their high price tags, autos are bucking the trend of weak consumer spending. Auto sales in the United States are still on track for their best year since 2007, when 16.1 million vehicles were sold. The industry hit rock bottom in 2009, falling to a 27-year low of 10.4 million vehicles. This forced GM into bankruptcy, and the company required a government bailout and restructuring to return to the market. Ford survived without a bailout, but its sales continue to trail GM both in the United States and abroad. Shares of GM rallied nearly 6% prior to the July 4 holiday.

GM attributed its strong domestic sales to solid demand for its small and midsize cars, in particular is all-electric Chevrolet Volt and subcompact Chevrolet Sonic. The Volt, which initially worried investors due to a massive recall and a halt in production, made a roaring comeback by tripling sales in June, selling over 1,700 vehicles. Although that number still remains small, the Volt is considered GM’s crucial foothold in the electric car market. Strong sales of the Chevrolet Sonic helped offset a 24% drop in Chevrolet Cruze sales. The compact Cruze was GM’s best-seller last year, after the earthquake and tsunami in Japan halted production of several best-selling Japanese compacts from Toyota (TM: Charts, News), Honda (HMC: Charts, News) and Nissan. GM also anticipates double-digit sales growth for its Chevrolet Malibu and Buick LaCrosse midsize vehicles. GM’s truck and SUV sales also rose by 11%. Sales of the company’s best seller, the Silverado pickup, rose 3% as housing construction recovered slightly during the first half of the year.

Meanwhile, in China, GM and its joint-venture partners sold 213,495 vehicles in June – a 10.1% increase from a year earlier. For the first half of the year, GM China’s sales rose 11.3% to 1.42 million units. Like the American market, GM’s China remain strong despite macroeconomic threats. Kevin Wale, the President and Managing Director of GM China, acknowledged macro problems but remained upbeat regarding GM’s growth. “Despite signs of slowing economic growth in China, demand for GM products rose in all key segments in the first half of the year,” Wale stated. “We expect sales growth to remain steady in the second half, driven by demand in China’s interior provinces.”

GM has also been reportedly in talks with Facebook (FB: Charts, News) to ink a new advertising deal on the social network. GM pulled its ads, worth $10 million, prior to Facebook’s IPO, stating the ads were “ineffective.” Shortly afterward, GM announced that it would also refrain from advertising during next year’s Super Bowl. In retrospect, these decisions were made to cut costs and streamline operations, and a new deal with Facebook suggests that GM’s financial health has improved to the point that it can spend more on marketing once more.

Europe remains the top concern of GM investors. GM recently announced the terms of its partnership with Peugeot, which is also taking heavy losses in Europe. France-based Peugeot would take over GM’s logistics in Europe, becoming responsible for the delivery of cars, parts and materials for GM. The partnership is estimated to generate $1 billion in cost-saving synergies for both companies within the next five years. Analysts are also watching a meeting with unions on July 12, as well as plans to close a production plant, which is necessary to minimize losses in Europe, for some insight on the effectiveness of the GM-Peugeot partnership.

Shares of GM have fallen nearly 40% since its IPO, but they now trade at a mere 4.7 times forward earnings with a 5-year PEG ratio of 0.43, making it a tempting investment for patient value investors. While the U.S. government is still the largest stakeholder of GM, the Obama administration has made it clear that it does not intend to sell its stake, which must reach $51 to break even, at a massive loss. Any signs of improvement from Europe and China should be considered catalysts for GM stock to stage a massive rally.

Other News About GM
Peugeot Arm to Handle GM Europe Logistics
Can GM’s partnership with Peugeot stop the bleeding in Europe?
GM in Talks With Facebook to Post Paid Ads Again
Are things looking up for both GM and Facebook once again?

Other Stocks in the News
Barclays CEO Diamond Quits After Record Libor-Rigging Fine
Barclays CEO falls on his sword, but the bank is still under close watch.
Google Shutters Several Products
Google tries to slim down its operations.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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