Looking Beyond GM's Earnings

Rahul 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) posted better-than-expected second-quarter results driven by its strong performance in North America and China, backed by trimmed losses in the European market. The US automaker’s revenue rose 3.9% during the quarter, but net income dropped 16% from the year-ago quarter on account of the international market, which showed signs of weakness. Let’s take a closer look at some essential figures of the quarter.

A look at the results

The top US automaker reported revenue of $39.1 billion, up 3.9% from last year. This was majorly driven by strong pickup demand in the North American market, where the Detroit automaker earned good money. However, second-quarter earnings fell 20% to $1.2 billion from $1.5 billion a year earlier due to mixed results in the international market.

Key market

The United States was the key market, where sales rose 9% to $23.5 billion and operating income increased 4% to nearly $2.0 billion. General Motors reported its second-quarter earnings just a day after fellow Detroit-player Ford (NYSE: F) came out with its results. Both of the automakers are gaining massively with the revival of the housing sector, which is boosting the demand for pickups.

However, Ford was a step ahead of General Motors and not only reported higher operating margins, but posted more vehicle deliveries as well. Ford generated a $2.3 billion profit compared to its bigger rival, which recorded slightly less than a $2.0 billion profit from the North American business. Moreover, Ford sold 823,000 vehicles in North America compared to General Motors, which sold 809,000 units. Globally, General Motors sold 2.5 million cars in the second quarter while Ford delivered 1.7 million vehicles.

Dealing with the dull market

Europe remains an area of concern for General Motors; the company experienced a 7% decline in revenue to $5.2 billion. However, one of the important things in the quarterly results was the narrowing European losses resulting from the automaker’s cost-cutting effort.

Both General Motors and Ford saw improvement in the European market. Though the macroeconomic outlook and future demand across the Atlantic remains poor, the Detroit automakers worked on trimming down overhead costs. General Motors managed to restrict its European loss to $110 million, remarkably down from $394 million in last year’s quarter. Ford's European loss also contracted to $348 million from $404 million last year.

International market with mixed results

General Motors experienced a rough quarter in the international market including Southeast Asia, India and Australia where its Japanese rivals took advantage of the weakening yen and lowered car prices.

A weaker yen is giving room to the Japanese automakers to have lower prices to boost sales and compete with their US rivals. It bolstered Toyota Motor's (ADR) (NYSE: TM) profit to $3.2 billion in the latest quarter. The currency gives Toyota a massive cost advantage to manufacture vehicles in Japan. Additionally, the automaker is also undertaking cost-reduction techniques to bolster its profit.

Even Nissan is benefiting from the weakening yen, which helped its profit climb 14% in the last quarter. The company can use this financial gain to offer cars at discounted prices, increase advertisements, and invest in developmental activities.

Both Ford and General Motors are flourishing in the domestic market, but are sensing the pressure coming from their Japanese counterparts in the international market.

General Motors saw a huge drop in its profit from international operations, which fell 64% to $228 million. However China, where the company is the largest foreign automaker, remains an attractive market. Strong demand for Cadillac and Buick automobiles in the mainland helped the automaker to alleviate the effect of softer sales in the rest of the international market.

On the whole, General Motors' Chief Executive Dan Akerson is happy with the condition in the domestic market as well as China, which is assisting the company to overcome challenges in the European market and the international division.

In fact, General Motors marginally outsold Toyota in the second quarter of 2013 by reporting sale of 2.5 million cars against Toyota’s slightly less-than 2.5 million vehicles. One of the driving forces behind the Detroit car maker's success is its popularity in China, where Toyota is struggling after the recent political clash between Japan and China.

Looking ahead

GM is pretty excited with the upcoming launches planned for the year. The company plans to roll out 18 new or redesigned models during the year. In fact, the revamped Silverado and Chevrolet Corvette are among the company’s fresh offerings. The primary purpose of coming out with fresh models is to improve the operating margin to 10% and compensate for the European losses. Akerson also aims to push China sales up to 5 million vehicles by 2015.

The company also formed a business service group last month, primarily to restructure back-office processes and cut costs by over 30% in the next four years.

The Detroit automakers expects to continue to gain from the surge in pickup demand in the second half of the year. The rebound in the housing sector is not a temporary phase; it is expected to improve and stay strong in the next few years.

However, as far as the international division is concerned, the weakening yen is giving General Motors a tough run for its money in the short run. This is working in favor of Toyota, Nissan and other Japanese auto giants as manufacturing cars in Japan is giving cost advantages.

The bottom line

GM's chief financial officer, Dan Ammann, rightly pointed out that risks related to the European macro environment are out of the company’s control. But keeping costs in check to narrow losses is within the company’s means. The automaker may be reporting lesser revenue in Europe compared to Ford, but it is nearing the break even-level faster. In fact the company is making good progress there and expects to break even in the European market by mid-decade.

In the domestic market, the redesigned Silverado and the GMC Sierra are bringing good money to the company’s pockets; all a credit to the housing-sector recovery. Though the company is facing tough competition from Ford in the pickup segment and arch-rival Toyota in the international division, I believe that there is huge potential in the stock. GM's upcoming lineup is set to boost its sales and operating margins.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Rahul Chattaraj has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus