General Motors (GM) posted strong earnings results for 2011 and reclaimed the title of world's largest automaker (in terms of sales volume) from Toyota (TM) in January this year.

The automotive giant's bottom-line grew by about 62% to reach $7.6 billion for the full year. It sold 9,025,942 vehicles in 2011, registering a growth of 7.6%.

GM's closest competitor is Volkswagen, which is in a distant second place, with approximately 8.1 million vehicle sales. While Toyota, with about 7.9 million sales, stands in the third place.

However, the picture is not as rosy as it may look at first glance. The company lost approximately $600 million in the fourth quarter in Europe, and the continuing losses in this region have put management in a tough position. Though the cumulative loss of $747 million for 2011 represents a $1.3 billion improvement over 2010, the problem is still too big to ignore.

With the European economy expected to stay in doldrums at least for the first half of the year, the company needs to look beyond conventional ways of addressing this challenge. GM has taken major restructuring initiatives to pull back its European operations and is in talks with unions on cost cutting. The car maker also announced some management changes and is pushing hard to make its European operations profitable.

 

GM was reported to be in talks with French automaker Peugeot to strike an alliance that would focus on joint development of new engines and potential new models. The company expects to cut costs through consolidation of operations but the continuing over-capacity in a fiercely competitive European market might prove to be too big a hurdle for a small step like this. Having said that, this has to be one of the many steps the company needs to take to turn things dramatically in its European business, which has not seen a profitable year since 1999 and has lost approximately $14 billion in the last decade.

U.S. and China to Steady the Ship

Amid the continuing losses in Europe and a fourth-quarter loss of $225 million in South America, the revival in demand in the U.S. and Chinese automotive industry came as a big relief for the company.

General Motors saw its market share climb to 19.2% in the U.S. and 13.6% in China. Through its joint venture in China and a strong product portfolio in the U.S., GM is well-positioned to capitalize on the rising volumes of the automotive industry in these key markets. However, with Toyota and Honda back to full production capacity, the path toward redemption is not going to be easy.

We are reviewing our price estimate of $26.36 price for GM, which is at a slight discount to the current market price.