On October 31st, General Motors (GM) reported its third quarter earnings. The company had revenues of $37.6 billion which was a 2.4% increase from revenues of $36.7 billion in the third quarter of 2011. Net income was $1.5 billion which was a 13% decrease from net income of $1.7 billion in the third quarter of 2011. Earnings per share came in at $0.89 which was a 16% decrease from earnings per share of $1.03 in the third quarter of 2011. "Excluding one-time items, GM made $0.93 cents per share, easily beating Wall Street expectations of 60 cents."
As always GM's European business lost money. In the third quarter, GM lost $478 million pretax in Europe, compared to a $292 million loss a year earlier. Full year losses in Europe could be as high as $1.5 billion to $1.8 billion, and the company predicts that fiscal year 2013 losses will be only slightly better. The European debt crisis has pushed much of Europe into a deep recession which has sent auto sales in the region to a 20 year low. In the third quarter, the company lost $478 million in Europe, and it expects to lose between $1.5 billion and $1.8 billion for the year. GM now predicts that fourth quarter European results will mirror those of the third quarter. When asked about Europe GM executives said that they were committed to fixing Opel its principle European brand, yet they failed to lay out a comprehensive plan about how they expect to reduce future European losses. The company's unwillingness to change its European strategy is concerning.
In North America, GM's pretax profits fell by 17% to $1.8 billion from $2.2 billion in 2011 as "lower pension income and higher costs for warranty claims offset lower raw material and freight costs." The company also saw its U.S. Market share decrease during the quarter. The decrease in market share (from 20% to 18.1%) was expected as "Toyota Motor (TM) and Honda (HMC) have regained market share they lost to G.M. and other companies last year because of inventory shortages caused by the earthquake and tsunami in Japan."
GM's other overseas businesses did better than Europe and North America. In South America GM increased its profits to $114 million up from a loss of -$44 million in the third quarter of 2011. Overall the company's international unit which is anchored by its large Chinese business, earned pretax income of $689 million, compared to income of $365 million last year. GM once again sold more cars and trucks in China than in the United States in the period.
In positive news, GM's cash flow from its auto business improved to $3.1 billion up from $1.3 billion in the third quarter of 2011. Also, the company reduced its pension liability by $29 billion, with a buyout program that induced about 30% of its eligible U.S. salaried retirees to take a lump sum payout in lieu of ongoing pension benefits. GM also announced that it expects to close a deal in November in which The Prudential Insurance (PRU) will assume responsibility for pension obligations covering GM's remaining eligible U.S. salaried retirees.
Recent News about General Motors Company
On October 31st, it was announced during General Motors' earnings call that the company:
- Profit trends in Q4 following seasonal patterns with results forecast to be close to or slightly higher than 2011.
- Portfolio mix is a major goal with 23 new models and 13 new engines scheduled by 2016.
- Plans to close margin gap with Ford as new products and platforms contribute.
- On Europe, a "conservative" approach to estimates will be used as it takes its headcount down by over 2.6K. The Eisenach plant will reduce its third shift, Astra production consolidated, and Strasbourg plant is under review.
On October 31st, it was also announced during the third quarter earnings call that General Motors CFO Dan Ammann told CNBC the automaker's impressive revenue haul was split between gains in pricing and volume. He also notes the company took close to a $1B hit from foreign currency translation that kept the revenue number from being even more impressive.
On October 30th, General Motors confirms that a strike at Lears in Ontario is forcing it to limit production at its Oshawa Assembly Plant in Ontario. The automaker builds Chevrolet Impala and Chevy Equinox vehicles at the location.
On October 30th, it was announced that a surprising slip in profits at SAIC Motor in China doesn't bode particularly well for General Motors, Volkwagen (VLKAY.PK), or Ford (F). Though tensions between Japan and China hurt Japanese automakers during the month, the development also comes against a larger backdrop of slumping demand in China.
After GM reported third quarter earnings, its stock price rose 9.5% on about three times its normal trading volume. The bump in the stock price resulted because investors were pleased that GM outperformed analyst's expectations. The bump in the stock price was fine, but I think that rally will be short lived. GM's third quarter North American earnings and market share were down, and its biggest problem, (losses in Europe) has not been dealt with. Analysts believe that the price of GM shares will be directly linked to its troubles in Europe, and I agree. GM earnings are not likely to show significant improvement until they figure out a way to cut losses in Europe, and they have already predicted that its European earnings in 2013 will be only slightly better than 2012. For the above reasons I do not believe that GM's stock price will rise above $26. Since GM's stock price has peaked, and it does not pay a dividend I see no reason to own the stock at this time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.