Buoyed by the news of an improvement in the European operations, General Motors‘ (GM) shares climbed 3% after the automaker announced its first quarter results. GM’s total revenues were down 2.4% to $36.9 billion while the net income declined 10.6% to $1.2 billion, or 67 cents a share. In total, GM sold 3.6% more vehicles this quarter than it did in the first quarter of 2012. After a strong run at the end of 2012, GM’s shares have gained more than 10% year-to-date.
North America Still Strong
With almost 60% of the revenues coming from this region, North America is the most important market for GM. GM’s unit sales were up a solid 8%, helped by a strong performance in its pickups and the Cadillac brand in the U.S. Operating margins were a mediocre 6.2%; however, there were extra expenses this time associated with the model refreshments slated to be launched later in the year.
The most important of the makeovers will be the new Silverado, its highest selling vehicle in the U.S. Moreover, since the pickups have heftier margins compared to small cars and sedans, the vehicle is the automaker’s perennial cash cow. The second half of the year should see an improvement in the margins in the absence of one-time investments associated with the product launches and a higher price that is typically associated with a model upgrade. In total, GM plans to launch a total of 13 new or refreshed models under the Chevy brand. So, how the margins pan out over the course of the year will be critical in deciding the kind of margins that are sustainable in the long run.
Another factor that might contribute to GM’s profitability is Cadillac’s revival. Cadillac’s sales in the U.S. were up 38% through March and the automaker is targeting unit sales gains of 30% in 2013. Luxury cars also tend to have higher margins and therefore, a greater proportion of Cadillac sales is likely to boost the overall margins.
Considerable progress was made in Europe as the automaker’s operating losses shrank to $178 million vs. $294 million in the previous year quarter. European losses could be as high as $2 billion for 2013, although a strong start to the year suggests that the automaker might contain the losses well within that figure. A word of caution, though. This comes after the automaker booked an asset impairment of $5.2 billion in the fourth quarter of 2012. Because of the asset impairment writedown (meaning that the losses were recognized once instead of depreciating them in the subsequent quarters), the automaker’s operating losses are expected to decline in the subsequent quarters.
There is still no consensus when the automotive market in Europe will bottom out. The European auto market has consistently declined in the range of 8-10% every month through March. It slumped by a similar percentage in 2012 as well. GM is currently in the middle of a restructuring in Europe, and expects to be profitable only by the mid-decade.
Europe is a major concern for a number of automakers including GM and Ford due to overcapacity issues. Moreover, governments and labor unions are a major impediment to shutting plants with excess capacities. Besides capacity reductions, GM is also relying on its new launches Adam and Mokka to boost its top-line. 
GM’s equity income in China swelled 31% to $548 million, helped by a 10% increase in the unit sales. Since GM operates in China along with its joint ventures (JVs), the automaker reports the net income earned through its equity affiliates. The automaker’s Chinese operations contribute more than 35% to the company’s stock price as per our estimates.
The automaker is extremely bullish on the Chinese automobile market as it targets annual unit sales of 5 million by the mid-decade, up from 2.84 million in 2012. GM is pouring in a staggering $11 billion over the next few years to extend its position as the market leader in the world’s largest automotive market.
We currently have a price estimate of $28 for General Motors’ stock, but we are in the process of revising our estimates in order to incorporate the latest earnings.
Disclosure: No positions.