General Motors Upgraded to Neutral

We have upgraded our long-term recommendation on General Motors Company ( GM - Analyst Report ) to Neutral. The largest automobile manufacturer in the world and one of the ‘Big Three’ U.S. automakers benefits from its focus on the emerging markets and expects further improvement from its expansion across the globe.

General Motors is expanding its footprint in the emerging global markets including Brazil, China and India. The company expects its global expansion strategy to enhance its sales and meet the rising demand.

General Motors has increased its U.S. light vehicle sales expectation for 2012 to 14 million–14.5 million units from prior guidance of 13.5 million–14 million units, based on the improved macroeconomic conditions in U.S. and pent-up demand in the automotive sector. Further, the launch of 20 major vehicles across the globe in 2012 will boost the company’s unit sales and revenues.

However, the company faces challenges from the ongoing financial crisis in the euro zone. Its European operation Opel expects to incur an operating loss of €1 billion ($1.3 billion) in 2012 due to fewer-than-anticipated car sales.

General Motors, in the second quarter of 2012, registered a 41% decline in its profit to $1.49 billion or 90 cents per share from $2.52 billion or $1.54 in the corresponding quarter of 2011. Nevertheless, the earnings per share exceeded the Zacks Consensus Estimate by 15 cents.

Total revenues fell 4.5% year over year to $37.60 billion in the quarter, missing the Zacks Consensus Estimate of $37.98 billion. The decline in the profit and revenues was attributable to strengthening of the U.S. dollar against most of the major currencies as well as weak macroeconomic conditions globally, especially in Europe and South America.

Ford Motor Co. ( F - Analyst Report ) , one of the major competitors of General Motors, also expects to incur losses between $500 million and $600 million in 2012 in the 19 European markets, owing to the ongoing debt crisis in the region.

Our recommendation on General Motors is backed by a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.