GM Back in Action, But Wait!

Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When the stock exchange reopened after four days, great volume trades were seen across the board. Post-Sandy, home improvement stocks like Home Depot and Lowe's saw big surges while tech stocks took a fall. However, among the most noticeable winners were US automakers Ford (NYSE: F) and General Motors (NYSE: GM). Ford, which reported Q3 earnings a day earlier, beat EPS forecasts by $0.10, reporting EPS of $0.40, and beat revenues by $800 million. General Motors is also back with a bang! Its Q3 EPS of $0.85 beat estimates by $0.25 and revenues of $37.6 billion beat estimates by $1.9 billion.

Compared to Ford which beat analyst EPS estimates by 32%, General Motors beat estimates by 36%, which translated into GM's stock closing 9.5% higher with Ford's up 7.7%. What remained common between their earnings report was their remarkable performance in their North American segments amidst losses in European segments. In International segments, both companies reported mixed results but Asia remained profitable overall for both automakers. Let's look at a summary of GM's third quarter earnings. 

Q3 Highlights

<table> <tbody> <tr> <td> </td> <td>GM Q3</td> </tr> <tr> <td>Adjusted EBIT</td> <td>$2.3B</td> </tr> <tr> <td>Net Cash Op. Act.</td> <td>$3.1B</td> </tr> <tr> <td>Op. Income</td> <td>$1.6B</td> </tr> <tr> <td>Net Income</td> <td>$1.5B</td> </tr> <tr> <td>Net Revenues</td> <td>$37.6B</td> </tr> </tbody> </table>
  • General Motor's adjusted EBIT stood at $2.3 billion, about $100 million better than a year ago.
  • Four out of five of GM's business units were profitable. The only loss-making unit was GME (European operations) that faced an adjusted loss before interest and taxes of $500 million.
  • Free Cash Flows generated in Q3 were $1.2 billion bringing the year-to-date total to $3.2 billion. This is a $1 billion improvement from last year.
  • Capital spending on new products, plant and equipment was set at roughly $8 billion annually, up from about $6.2 billion last year.
  • GM faced $1.3 billion year-over-year negative impact of unfavorable foreign exchange translation.
  • Effective tax rate this quarter was about 20%, compared to less than 6% last year.
  • GM faced a $100 million special one-time impairment of goodwill in Korean operations. This charge reduced diluted EPS by $0.04. 
  • Change of various important items and indicators from Q3 last year is summarized in the table below.
<table> <tbody> <tr> <td> </td> <td><strong>Q3</strong></td> <td><strong>Increase (Decrease) from Last Year</strong></td> </tr> <tr> <td><strong>Global Market Share</strong></td> <td>11.6%</td> <td>(0.5%)</td> </tr> <tr> <td><strong>Net Revenue</strong></td> <td>$37.6B</td> <td>$900M</td> </tr> <tr> <td><strong>Net Income</strong></td> <td>$1.5B</td> <td>($200)</td> </tr> <tr> <td><strong>Diluted EPS</strong></td> <td>$0.89</td> <td>($0.14)</td> </tr> <tr> <td><strong>Op. Income Margin</strong></td> <td>4.3%</td> <td>(0.6%)</td> </tr> <tr> <td><strong>EBIT Margin</strong></td> <td>6.1%</td> <td>0.1%</td> </tr> </tbody> </table>


North America

<table> <tbody> <tr> <td> </td> <td>Q3</td> <td>Increase (Decrease) from last year</td> </tr> <tr> <td>Market Share</td> <td>17.6%</td> <td>(2.1%)</td> </tr> <tr> <td>Net Revenue</td> <td>$23.3B</td> <td>$1.4B</td> </tr> <tr> <td>EBIT Margin</td> <td>7.8%</td> <td>(2.2%)</td> </tr> <tr> <td>Days required to replenish inventory</td> <td>82 days</td> <td>15 days</td> </tr> <tr> <td>Adjusted EBIT</td> <td>$1.8B</td> <td>-</td> </tr> </tbody> </table>

 

In North America, as mentioned earlier, the company did pretty well. 62% of its revenues came from the region, yet it lost more than 2% of its market share. Honda and Toyota are now back in the picture with their inventories back to normal levels. Last year, in the same quarter, GM was able to achieve better results because of Honda and Toyota's post-tsunami supply running low. Not anymore! Presently, both of GM's Japanese rivals have their market shares following upward trajectories than the US automaker.

Europe

<table> <tbody> <tr> <td> </td> <td>Q3</td> <td>Increase (Decrease) from last year</td> </tr> <tr> <td>Market Share</td> <td>8.6%</td> <td>(0.2%)</td> </tr> <tr> <td>Net Revenue</td> <td>$5.1B</td> <td>$1.1B</td> </tr> <tr> <td>Adjusted EBIT</td> <td>($500)</td> <td>($200)</td> </tr> </tbody> </table>

 

In Europe, the company has lost money for over a decade now. Since 1999, GM has lost about $17.3 billion in the region. In the latest quarter, approximately $500 million was lost due to unfavorable FX translation as Dollar strengthened against the Euro. Adjusted EBIT margin in the region was in the red, -9.4%. Losses in Europe for FY2012 are expected to be between $1.5 billion - $1.8 billion. GM's management promises slightly better results in 2013 but losses will continue.

Such disappointing results led me to question whether GM should continue its European operations? GM made some good moves in Europe lately. They've started restructuring by cutting jobs in Europe in order to save some millions. This year, $300 million is expected to be saved in costs from job cuts and an additional $500 million is expected to be saved in the next two years. They've also cut down on inventory. This year's production is down 27% from last year and finished goods inventory is down by $400 million from Q2 this year. 

Another positive move in the region is GM's alliance with French automaker PSA Peugeot Citroen (NASDAQOTH: PEUGY.PK), under which both companies would jointly develop small and mid-size cars, vans and utility vehicles. The companies are also nearing the closure of a deal that will help them reduce costs by shared purchasing of inputs. The alliance will help GM understand the European demand in local perspective and design products more welcomed in the region. Ford needs to look out as GM's better positioning in the region could further dent Ford's revenues in Europe.

International/China

<table> <tbody> <tr> <td> </td> <td>Q3</td> <td>Increase (Decrease) from last year</td> </tr> <tr> <td>Market Share</td> <td>9.4%</td> <td>(0.2%)</td> </tr> <tr> <td>Net Revenue</td> <td>$6.7B</td> <td>$600M</td> </tr> <tr> <td>EBIT Margin</td> <td>4.4%</td> <td>.5%</td> </tr> <tr> <td>Adjusted EBIT</td> <td>$700</td> <td>-</td> </tr> </tbody> </table>

 

The international segment took an unfavorable impact of $300 million lost in forex translations. However, the region was the second best performing segment for GM as the current quarter was GMIO's fourth consecutive quarter of improved performance. Most of this improvement comes from China where GM is becoming the market leader. In China alone, GM holds a 14.4% share of the auto-market as of Q3, which is up 0.7% year-to-date. The strength in Chinese demand can be seen from GM's increasing production in the country.

South America

<table> <tbody> <tr> <td> </td> <td>Q3</td> <td>Increase (Decrease) from last year</td> </tr> <tr> <td>Market Share</td> <td>17.9%</td> <td>(0.8%)</td> </tr> <tr> <td>Net Revenue</td> <td>$4.3B</td> <td>($100M)</td> </tr> <tr> <td>Adjusted EBIT</td> <td>$100</td> <td>-</td> </tr> </tbody> </table>

 

Despite a decrease in net revenues, GM was able to achieve a net profit of $144 million this quarter, compared to last year's $44 milion loss. The company lost a portion of its market share in South America, just like other regions, and the management justifies it with older product offerings in the region. But with plans to launch seven new models in Brazil, the company is expected to swing more profits from this emerging market in the years to come.

Follow the Contrarians

For a quick look at what lies beyond Q3 for the US automaker, click here. We may be looking at a turnaround for GM. The company's operations are expected to improve once the Europe problems are taken care of and we start seeing newer models on the road. Until then, be Foolish and follow your contrarian neighbour next door. Sell when everyone's buying and buy when everyone's selling. The stock is clearly overbought at the moment. As Buffett would say, 'be fearful when others are greedy'.


PalwashaS 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.

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