How General Motors Stacks up Against the Rest
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Motors (NYSE: GM) came out with its second quarter earnings which further highlighted the prevailing weakness in the industry. Though the results were better than expected, it was not pleasing for investors since they had yet another warrior in the automaker industry to give up to the European crisis. With Ford Motor Company (NYSE: F) posting depressing results some time back, investors got so afraid so that they did not dare invest in the industry. The main cause of a 57% earnings decline was weak demand mainly from Europe and also China to some extent. To overcome the problems, Ford will be using its tested formula of cutting costs and new design roll-outs.
Key Numbers of the Quarter…
Coming back to General Motors, revenue for the quarter was down 5% to $37.6 billion, mainly because of unfavorable currency fluctuations. Basically, strong dollar led to lower revenue from overseas operations when converted to home currency. In fact, volumes had increased over the prior year which is definitely a positive sign to notice. But higher volumes could do nothing to save the automaker’s bottom line from declining a disheartening 41% to $1.49 billion.
As advocated by Ford, the key pullback in earnings came from its European business, which registered a loss of $361 million because of the sovereign debt crisis leading to shrinking demand for the expensive range of cars. Even earnings in North America declined slightly, attributed to cheaper vehicle sales. Moreover, last year was a bumper one since it witnessed a one time jump in sales due to a higher roll-out of Delphi stock, which was absent this time.
Though the results were better than expected and overall earnings were in the green, it did not show any sign of optimism. In fact, the earnings dropped compared to last year’s quarter in spite of the fact that General Motors shifted its plant upgrades and other costs to the next quarter which would have otherwise affected the bottom line further.
Peer Results
The leading player in the industry, Toyota Motor (NYSE: TM), on the other hand, was the star performer this time around. It not only managed to show on the top line a whopping increase of 60% to $70.5 billion, but also the bottom line, which grew an amazing 241% to $3.62 billion. The drivers of the stellar quarter were great demand for its vehicles and its superb cost controlling measures. A very valid reason for the growth numbers was the fact that last year’s period was highly affected by natural disasters in Japan which punished the results cruelly, setting a lower base this time.
However, the performance cannot be overshadowed because of this, since Toyota experienced growth even in other geographical regions. Moreover, the automaker witnessed great volumes, leading it to raise guidance for the year and regain its leading position. Hence, General Motors lost out to its strongest peer by being unable to post such eye popping results in such circumstances.
Strategies in Progress
As I had mentioned in an earlier post, General Motors has been trying to overcome difficult times in Europe by partnering with the local players of the region by acquiring stake in PSA Peugeot Citroen. This is done to save on costs of almost $2 billion annually, resulting from the synergies of the combined entity. But this strategy is not a complete remedy either since the company will still face the problem of more production than demand. The problem has been hovering on General Motors’ Opel, the European unit, so much so that the company has finally decided to close down its factory in Germany. This is the key problem: overcapacity, for which the car maker has not had a proper solution implemented till now.
The Takeaway
A good point to note is that the company has managed itself very nicely. A company that needed a government bailout three years ago has been posting profits for the last 10 quarters, which is commendable given the tough economic environment. Moreover, General Motors did not cut prices to make itself competitive - quite bold given competitors’ pricing measures.
Though General Motors hasn’t shown any genuine signs of recovery, its operations in the domestic and emerging markets have been decent. However, we cannot ignore the losses incurred in Europe and the overall decline in earnings. Also, its competitor has been a better performer. Hence, it is better to stay on the sidelines and watch for an opportunity to invest in the stock instead of jumping into it just because it has been showing profits recently.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
