GM’s Results Do Not Thrill Investors

Eshna 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) results have failed to create any ripples in the market. The company reported adjusted fourth quarter earnings of $0.48 per share vis-à-vis analyst expectations of $0.51 per share. Revenue increased 3% to $39.3 billion. For the full year, GM earned $4.9 billion, or $2.92 per share on revenue of $152.3 billion. Analysts expected $3.23 per share on revenue of $151.1 billion.  The tax payers who had bailed out the company in 2009 can seek some comfort from the fact that GM has now posted profits for the third year in a row. However, investors need more than just ‘steady’ results if they are to get enthusiastic about this stock.

Over the last few months there has been a lot of excitement over the government’s decision to sell off its stake in GM, resulting in gains for the stock.  Now that the announcement is already factored in, investors are becoming more concerned about the company’s European losses, profitability, and widening margin gap with rivals like Ford (NYSE: F) in the US. Loss of market share in the global as well as core US markets adds to the list of worries.

Europe remains the key concern

The company has reported losses in Europe for the thirteenth year in a row. 2012 losses were $1.8 billion – at the higher end of its guidance of $1.5-$1.8 billion. Even if GM’s plans of returning to profitability in 2015 were to come true, the turnaround is still three years away. Meanwhile the company would have seen sixteen consecutive years of losses! GM is trying to formulate a strategy for Europe and has even announced the closing of a factory – the Bochum plant in Germany – of it long struggling Opel unit. However, Europe is laden with glut, and automakers like Ford, Renault, Peugeot, and Fiat are often running at 50% of their installed capacity. The problem is that the labor unions and governments make it very difficult to rationalize capacity here. Demand for cars is falling, and the situation is likely to worsen before it eventually bottoms out. In 2012 car sales were at a 17-year low. Cost cutting has become the key to survival in these uncertain times, and GM should take a cue from Volkswagen (NASDAQOTH: VLKAY), which has been able to lower its break even capacity utilization to as low as 45%. Volkswagen continues to remain a champion in the troubled European markets and sells around 40% of its vehicles here. Although the company is starting to feel the pinch as evident from its guidance of a flat operating profit for 2013, the most important fact is that Volkswagen is still profitable in Europe, unlike GM and Ford.

 Profitability challenge

GM lacks pricing power in the core US markets. The company’s lineup is among the oldest in the US and it often has to rely on dealer incentives to clear stock pile up. In December it was straddled with double the inventory of trucks with its dealers, which needed heavy incentives for clearing. According to researcher Autodata Corp., GM’ incentive spending on the Silverado was around $3,988 per unit in November 2012, while on the Sierra it was $4,226 per unit. This was well ahead of Ford’s $3,294 per unit. Also, Ford is gaining from its ‘One Ford’ strategy, which enables it to function with a lean cost structure and optimize capacity. No wonder Ford is operating at 10%-11% margins, while GM’s is still in the 7%-8% range.

In China, GM is posting solid volume growth but profitability is a drain because the small cars that are popular there are low on margins and substantial portions of the profits go to the joint venture partners. The Chinese government regulations require foreign car makers to take on local joint venture partners to be able to set up manufacturing units, and all car makers including GM, Ford, and Volkswagen are functioning under this model. Thus if the foreign car makers are to make money in China it is imperative to have a good presence in the luxury cars segment, which carry fat margins and leave decent profits even after payouts to joint venture partners. Presently GM is struggling to increase its foothold in the luxury cars segment with its Cadillac, while Volkswagen’s Audi is ruling the market. In 2012, all Audi models reported healthy y-o-y increases in units sold. The Audi A6L was up 23%, Audi A4L 15%, and Audi Q5 54%. In comparison, the Cadillac SLS was flat at the previous year’s level, and the Cadillac CTS was down 83%.

Loss of market share

It is quite disturbing that GM has reported a decline in market share in all of its markets other than its international operations, which include China. The most noteworthy is the drop in the US markets where GM reported a decline to 17.1% from 18% a year ago. Its global market share declined to 11.5% from 11.6%. GM is attempting to make a comeback with a revamped lineup for 70% of its models over the next couple of years, but whether or not it can regain its market share is yet to be seen.

 Last thoughts

GM is definitely back on track after its 2009 bankruptcy and its earnings provide a level of comfort for its future prospects. However, the company still has quite a task at hand. It needs to deliver on its upcoming launches, grow its market share, increase its pricing power, boost margins, and cut losses in Europe. Unless these happen, investors are unlikely to see significant upsides over the coming months.

tinade 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!

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