General Motors Is Making The Right Moves to Get Better

General Motors (GM) shares have dropped 10% this year as the company is facing a number of challenges. The company's performance in certain key geographies was weak last quarter. For example, in Europe, GM posted a disappointing performance with a negative adjusted EBIT of $45 million. Meanwhile, GM South America reported a negative adjusted EBIT of $0.1 billion, which was flat as compared to the second quarter of the last year.

Additionally, GM CFO Chuck Stevens is wary of the challenges that the company is facing in China.

However, GM plans to stick to its investment of $14 billion in the Chinese market in order to tap the long-term growth in this market. In fact, GM's China retail sales have increased 4.4% during the first six months of the year, with demand for SUVs such as the Buick Envision remaining strong.

However, GM had posted positive growth in earnings last quarter, which was driven by an increase in the volume sales of its vehicles, especially in North America. Its product mix was strong in North America, with the company selling a strong number of trucks and SUVs. Meanwhile, in Europe and South America, GM's favorable pricing policy helped the company reduce its losses. Moreover, GM's efforts to enhance the efficiency at its plants should keep it on track to deliver the target of $2 billion in savings for the entire year.

Improving metrics will act as tailwinds

GM returned a ROIC of 23.4% last quarter, which demonstrates its disciplined capital allocation. The company has been able to return over $3 billion to its shareholders so far this year through share buybacks. The good thing is that GM should be able to continue returning value to shareholders as its free cash flow and Return on Invested Capital increased nearly 70% and 60%, respectively, last quarter.

Moreover, in the conference call on the second-quarter earnings report, CEO Mary Barra talked about the things that GM is working on to execute the strategic priorities it has set for itself. The company is investing in technological and innovative advancements to drive its growth in the long run. For example, GM is going will launch the CarUnity car sharing app with Opel in Europe. This will help the company attract more customers to its models by offering a stronger technology portfolio.

Moreover, to take advantage of the growing truck and SUV segments, GM has adopted a three truck strategy. In the near future, GM will launch improved versions of the Silverado and Sierra pickups. Next year, GM will launch an aggressive line-up of its high-volume vehicles, the Chevrolet Cruze and the Chevrolet Malibu, which are expected to yield an additional profit of $1,500 per unit.

Conclusion

GM is making smart moves to achieve its plan for an improvement in full-year profit and margin growth versus 2014. The company has been able to reduce its losses by a large extent in Europe, while it is tapping key growth markets in order to improve its performance.

There were a number of negative factors in the first half of this year that have acted as a headwind for GM, but it expects things to improve as the year progresses. Thus, in my opinion, it is advisable for investors to remain bullish on GM for the rest of the year.

Published on Aug 23, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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