Are the GM Bulls Waking Up?

CHEAT SHEET Analysis: Curbing European losses would help GM’s momentum

A core part of our CHEAT SHEET investing framework looks at trends that are relevant to a stock’s movement. In this case, it’s necessary to look at the pressure that global economic headwinds have put on the auto industry, particularly in Europe.

Right now, automakers are facing what could be the worst European market in history. Sales are at their lowest level in nearly 20 years. In the most recent quarter, GM reported a pre-tax loss of $478 million, and is looking at full-year European losses between $1.5 and $1.8 billion.

Ford Motor Company (NYSE:F) is facing similar billion-dollar-plus full-year loss prospects in the region. Investors have reacted favorably to Ford’s aggressive work-force cuts and the closure of three European plants, aimed at bringing production capacity down to actual demand levels.

GM’s own bid to stabilize itself in the European market has been met with skepticism. The company’s loss-making Opel division, based in Germany, was floated for sale a few years ago but the company decided to commit to the brand at the beginning of the crisis. But as the crisis aged and losses piled up, speculation began to build again the GM would sell off or merge the division with another European automaker, most notably PSA Peugeot Citroen, a French car maker.

But for better or worse, GM has reaffirmed its commitment to the brand. Instead of selling or merging the unit, GM has pursued a parts-buying and production relationship with Peugeot. At the end of last week, the automaker announced the signing of an agreement to create the parts-buying joint venture and develop three new vehicles, expected to be launched in 2016.

GM’s approach feels slightly underwhelming in the short-term but shows long-term potential. For its part, Toyota Motor Corporation (NYSE:TM) has put a lot of pressure on the American manufacturers in North America, gaining share at their expense. If GM wants to remain dominant in the U.S.A. it’s going to have to shore up its problems in Europe.

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