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General Motors Analysis Essay

   General Motors Analysis

Introduction

     This paper seeks to conduct a Current Analysis of General Motors.  General Motors will be introduced as to the nature of its business and with the discussion of the automotive industry.  I will first analyze and discuss a description of the company and products and how they stand in relation to others in the industry. I will also discuss General Motor’s competitive advantages or disadvantages.  A basic ratio analysis of General Motors will be compared with industry standards and an explanation of the reasons for those ratios that deviate from industry standards will be made. Such ratio analysis will be supported with a summary of GM ratios as against industry standards and calculations.  The paper will also include recent or current market place information that could influence the company and the price of its stock in the future.  A technical analysis will be prepared together with a provision for references to price changes that are not related to fundamentals of GM’s business. Included is the fulfillment for the to look for  any patterns in the price change of the stock over the past 2 years.

      The last part of the paper will require me to give

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my opinion as to whether this stock should be bought, held, or sold, based on the analysis of the ratios and market place information.

2. Analysis and discussion

GM’s Nature of Business

      The company is primarily engaged in automotive production and marketing and financing and insurance operations.  Having its home-base and largest operating facilities in Northern America, it is engaged in the design, manufacture, and sale of vehicles worldwide.  General Motors’s operations in finance and insurance pertains mainly to General Motors Acceptance Corporation (GMAC), its wholly owned subsidiary, which provide a broad range of financial services, that are not limited to automotive finance and mortgage products and services (General Motors Corporation, 2006).

Automotive Industry

         The past five years saw the global automotive industry experiencing consistent year-to-year increases, growing approximately 13% from 2001 to 2005.  Much of this growth is attributable to the continued development of emerging markets such as China.

       The automotive industry still continues to exist.  (General Motors Corporation, 2006)

Said that in 2005, global industry vehicle sales to retail and fleet customers were 64.7 million units, representing a 3.7% increase over 2004.  The company expects industry sales to be between 65.5 million and 66 million units in 2006.  Its worldwide vehicle sales for 2005 were 9.2 million units exhibiting and increase as against to 9.0 million units in 2004.

       It has a global market share of 14.2% for 2005, declining 2004 global market share of 14.4%. Given the increase in 2005 as compare to 2004, would explain may not have performed very badly in 2005 rather the explanation of the company that losses came from expenses related to payment and recognition of liability for its employees, who are based in North America.  Hence it is not surprising when the company reported that in 2005, the company saw its posted market share gains in three of its four automotive regions, with the exception of GM North America (GMNA) where GM’s market share declined.  (General Motors Corporation, 2006)

       To further the claim that it sold better in 2005 compared to 2004 in terms of United States vehicles, sales totaled 17.5 million units, which slightly increase from the 2004 level of 17.3 million units.  This slight increase was however felt in terms of reduced market share the United States 25.9% for 2005, as compared to 27.2% in 2004 the decrease was blamed by the company in sales of full-size utilities, mid-sized utilities and mid-sized cars (General Motors Corporation, 2006)

2.1 A description of the company and products.  How they stand in relation to others in the industry.  What are General Motor’s competitive advantages or disadvantages?  This description should be brief; about 2 to 3 pages.

      Wikipedia (2006) describes General Motors Corporation, (GM), as the world’s largest automaker after is birth in 1908.  It presently pays the salary of about 326,999 people around the world.  Including global headquarters in Michigan, its makes its cars and trucks in 33 countries.  In 2005, GM sold 9.17 million GM cars and trucks were sold globally under the following brands: Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, Hummer, Oldsmobile (now defunct), Opel, Pontiac, Saab, Saturn and Vauxhall.  GM operates a finance company, GMAC Financial Services, which offers automotive, residential and commercial financing and insurance.  GM’s Constar subsidiary is a provider of vehicle safety, security and information services.

Competition none yet?

     Top 15 Motor Vehicle Manufacturers 2005 showed under Car and Light Commercial Vehicle Production showed General Motors to be the top as shown in Appendix B, besting even Toyota and Honda of Japan.

    GM’s competitive advantage as against competitors might include lower cost than competitors as could taken from the economies of scale due to big production. However this was further eroded by eroded by the high cost of employee benefits it had to pay for its bloated number of employees as a result of the ever changing technology.

2.2 A basic ratio analysis of General Motors compared with industry standards.  Explain the reasons for those ratios that deviate from industry standards.  A summary is needed of GM ratios vs. industry standards and calculations.  See Appendix A.

         General Motors’ Return of negative 62.85 is below industry average of 7.9.  This means the company is earning less that its competitors in 2005.  However previous to 2005, the company has reflected profits.  It net profit margin because of the loss is still way below industry average 1.77

      The decline in company’s performance is explained by the company as follow:

General Motors Corporation (2006) said that the company’s consolidated net sales and revenues fell to $192.6 billion in 2005 from $193.5 billion in 2004.  It incurred a consolidated net loss in 2005 of $10.6 billion, compared to net income of $2.8 billion in 2004.  The decline in income was very notice despite increase in sales in units and in dollars.  The company explained that the unfavorable results were driven primarily by losses at GM North America (GMNA).  It further explained that company’s results of operations in 2005 were most significantly affected by the following trends and significant events:

      The first is the GMNA market share and product mix – The company admitted that e industry-wide North American vehicle sales had only a slight growth, but Gina’s vehicle production declined by a higher rate in 2005 to 4.9 million units because of GM’s efforts to reduce high dealer inventory levels and because of decreased by 1.2 percentage points in market share.  This was triggered further by the result unfavorable product mix, whereby GM only made fewer sales of greater margin large trucks and large cars.  It blamed the combination of instability of consumer demand and the expected introduction of new truck models to replace products at the end of their lifecycles. (General Motors Corporation, 2006)

      The Second is the Delphi Chapter 11 proceedings – During the last quarter of 2005, Gm had to recognize a charge of $5.5 billion ($3.6 billion after tax) as an estimate of contingent exposures relating to the Chapter 11 filing of Delphi Corporation (Delphi).  This estimate included benefit guarantees for certain former GM U.S. employees who transferred to Delphi in relation the 1999 spin-off from GM. GM estimated range of these contingent exposures to be between $5.5 billion and $12 billion. ((General Motors Corporation, 2006)

       Debt to equity ratio of 3.9 is below industry average of 1.66.  This means that the company is riskier than the average.  This means that as an alternative investment among investors, it is less preferable than the average but it is still better compared to Ford Motors Co., a fellow American Car Company.

     The dismal result of operation in 2005 cannot de denied to have affected the right debt to equity ratio to GM making is higher above the industry standards.

      Despite the below average above its stock price to book value is 1.54 same industry standard of 1.54, which means that the company still commands a good stock price.

      In terms of market capitalization the same with none of the manufacturers above were able to reach the industry standard, but General Motors wins over Ford Motors but still way below the Japanese car manufacturers which exceeded more than a 100 billion US dollars.

2.3 Recent or current market place information that could influence the company and the price of its stock in the future.

    General Motors Corporation (2006) said that company’s loss, most of which related to its North American operations, clearly demonstrates the need for significant changes in GM’s business model.  It blamed a large part of these losses arise from GM’s huge legacy cost burden and the difficulty of adjusting structural costs in line with falling revenue.  The company defined legacy costs are primarily related to the cost of benefits provided to retired employees and their dependents, and costs associated with employees and their dependents of businesses divested by GM and structural costs are those costs that do not vary with production and include all costs other than material, freight, and policy and warranty costs.  Said structural costs include, among other things, the cost of unionized employees.  There are in a sense fixed cost which cannot be changed.

     It would not be surprising if the company finds ways of eliminating these fixed cost and the chosen strategy which a recent news that could bring up prices include the plan to retrenched a big number of it employees.

     There is a news that GM, Delphi, US autoworkers’ union agreement to massive job-cutting program. The news story dated March 23, 2006 reported that the United Auto Workers (UAW) union has concluded a deal with General Motors and its former parts company Delphi Corporation that paves the way for a major contraction in the US auto industry and the permanent elimination of tens of thousands of jobs. This “Special Attrition Program” provides retirement incentives and buyouts aimed removing old people with high benefits due long term work stay in the company (White, 2006) (Paraphrasing made).

      The deal would reduce 30,000 jobs across North America by the end of 2008, including 25,000 of its 105,000 US hourly workers. It was predicted that as a result of the of the reduction or  downsizing GM will be reduced to a much smaller operation, and claim to be the world’s largest automaker (White, 2006) (Paraphrasing made)

       It is making as top priority to return its North American operations to profitability and positive cash flow as soon as possible and with this intention GM has been   systematically and aggressively implementing its four-point turnaround plan for GMNA’s business.  Elements of the are as follows:

    * Product Excellence – continue to raise the bar in the execution of great cars and trucks

    * Revitalize Sales and Marketing Strategy – offer customers the best value in the industry

    * Accelerate Cost Reductions and Quality Improvements – improve GM’s cost position and reduce our breakeven point in response to an intensely competitive environment

    * Address Health Care Burden – reduce legacy cost disadvantages (General Motors Corporation, 2006)

    General Motors Corporation (2006) said that to have been focusing on restructuring its operations, and has already taken a number of steps to improve its performance in a more competitive global environment.  It added that a key driver of these efforts is the globalization of our principal business functions, including more aggressive engineering, product development, manufacturing and purchasing. Further it said, “In addition, we backed up our commitment to great cars and trucks by raising our related capital expenditures in 2005, and we intend to maintain this commitment going forward.  We are endeavoring to revitalize our sales and marketing strategy to more clearly focus customer recognition on our brands, aligns our distribution channels, and refocuses our marketing efforts on the quality of our cars and trucks and the value they offer in price, features and performance.”

2.4 A technical analysis is needed.  Refer to price changes that are not related to fundamentals of GM’s business.  Look for any patterns in the price change of the stock over the past 2 years.

      Information from the New York Stock Exchange (NYSE) show that lowest stock price recorded by for General Motors was 18 USD per share but from that time until to day price have been slightly on the increasing trend indicating that the worst may have been over and it is now taking off for recovery to before 2005 profit levels.  (Please Appendix C, excel file, worksheet: NYSE)

2.5 Give your opinion as to whether this stock should be bought, held, or sold, based on the analysis of the ratios and market place information.

      If one is the stockholder of a corporation, the decision to buy, hold or sell a stock is done by using common sense.  One will buy a stock because one expects that price go up and after that you will earn. Put it simply, one must have a profit objective.  If one is present stockholder of any corporation, his choice to sell or hold.  One will hold if one expects prices will go up but one will sell now if one expects that prices to fall.  Again the motivation is still profit or a winning proposition.  The bottom line therefore is the idea of profit maximization which is an inherent assumption in financial management.  In the same manner a stock holder or a would-be stockholder of General Motors will decide along the same line.  Now what would be the basis of one’s information for expectation?  The general rule is the historical information will or predicts some thing about the future of the company.  Hence, one’s decision will be based on out evaluation of out forecast based on historical information.  In case of GM, although it has exhibited losses in 2005, it die not mean that the company is losing hope.  If  one looks a the  ratio or price of stock over it book value it is within the industry standard and its prices have continued to go up to now since  lowest price in the New York Stock Exchange has sink to about 18 USD per share in December, 2005.

      As per analysis the company has competitive advantage over its competitors.  Under the five competing forces model, the industry has a very high barrier to entry because of the presence of switching cost.

Conclusion:

       Based on information and the corresponding analysis we have done, we found that the stocks of General Motors will continue to go up.  We have found that the cause the losses for the company in 2005 included the increase of benefits to its employees.  With the decision of the Company to retrench employees, as condition for the investors to improve the performance of General Motors, the future looks encouraging for investors.

       Hence any stockholder of the corporation could hold selling their stocks because prices are expected to go up in the near future.  For the would be investors, while the stocks of the corporation sells low, one should be encourage to buy share because of the expected rebound of the company.

Bibliography:

General Motors Corporation (2006),  Company Website, {www document} URL <http://www.gm.com/company/investor_information/docs/fin_data/gm05ar/content/financials/mda_gm/mda_gm_01.html, Accessed September 19,2006
New York Stock Exchange (2006), Statistics , {www document} URL http://www.nyse.com/about/listed/lcddata.html?ticker=gm&fq=D&ezd=1Y&index=5, Accessed September 19,2006
Wikipedia (2006) , General Motors Corporation , {www document} URL Accessed September 19,2006
White (2006), GM, Delphi, US autoworkers’ union agree to massive job-cutting program, {www document} URL http://www.wsws.org/articles/2006/mar2006/gemo-m23.shtml>, Accessed September 19,2006
Yahoo (2006), industry statistics, {www document} URL http://biz.yahoo.com/p/330conameu.html, Accessed September 19,2006

Appendix

Appendix A-Summary of Basic Ratios

Description up
Market
P/E
ROE %
Div. Yield %
Long-Term Debt to
Price to
Net

Cap

Equity
Book Value
Profit Margin % (mrq)
Sector: Consumer Goods
2572.7B
27.28
16.54
2.25
1.16
3.62
6.77
Industry: Auto Manufacturers – Major (More Info)
381.7B
25.6
7.9
1.62
1.66
1.54
1.7
Companies

Daimlerchrysler AG (DCX)
50.4B
10.16
11.19
3.7
2.17
1.1
4.69
Ford Motor Co. (F)
15.1B
NA
-9.51
2.5
11.07
1.1
-0.6
General Motors Corporation (GM)
17.9B
NA
-62.85
3.2
3.9
1.54
-6.21
Honda Motor Co. Ltd. (HMC)
119.0B
22.2
16.54
1
0.83
3.32
5.52
Tata Motors Ltd. (TTM)
7.3B
18.97
NA
1.5
NA
5.44
5.64
Toyota Motor Corp. (TM)
172.1B
13.73
15.05
1.2
1.03
1.94
6.59

Source: yahoo
http://biz.yahoo.com/p/330conameu.html

Appendix B

Appendix B

Top 15 Motor Vehicle Manufacturers 2005

under Car and Light Commercial Vehicle Production

General Motors
9,040
Toyota
7,100
Ford
6,418
Volkswagen Group
5,173
DaimlerChrysler
4,319
PSA Peugeot Citroën
3,375
Honda
3,373
Nissan
3,348
Hyundai-Kia
2,853
Renault-Dacia-Samsung
2,617
Suzuki-Maruti
2,072
Fiat
1,934
Mitsubishi
1,327
BMW
1,323
Mazda
1,285
Total global production:
67,265
Source: (Wikipedia, 2006)

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