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Shares of General Motors (GM) have seen healthy gains in the wake of its third quarter results, released on Wednesday before the market open.

The car manufacturer reported solid earnings, driven by its North American operations and better-than-expected performance in Europe.

Despite the ongoing improvements and prospects for the new line-up in 2014 and 2015, I continue to be cautious.

Third Quarter Results

General Motors generated third quarter revenues of $38.98 billion, up 3.7% on the year before. Despite the modest growth, revenues fell short compared to consensus estimates of $39.4 billion.

While operating earnings rose from $2.3 to $2.6 billion, reported GAAP earnings were under pressure due to higher tax expenses and losses from special items.

GAAP net earnings, after taking preferred dividends and charges related to the purchase of preferred stock into account, nearly halved to $757 million. GAAP earnings per share roughly halved from $0.89 to $0.45 per share.

Adjusted earnings, excluding special items came in at $0.96 per share, compared to $0.93 per share last year. Analysts were looking for earnings of $0.94 per share.

CEO and Chairman Dan Akerson commented on the third quarter developments, "we made gains in the third quarter as we improved our North American margins and increased our global share on the strength of our Chevrolet brand. Our efforts to build great cars and trucks and deliver solid financial results were recognized this quarter by Moody's investment grade rating."

Looking Into The Results

Like competitor Ford (F), the solid financial results at General Motors are driven by its North American operations. That being said, global sales rose by merely half a percent to 1.58 million cars. The global market share rose by 10 basis points to 11.7% as market shares across the continents have been relatively stable.

Operating earnings in the North American unit rose by 28% to $2.19 billion. Losses at the European activities more than halved to $214 million. Disappointing was the performance of the international activities, as operating earnings fell by 60% to just below the $300 million mark. Earnings in South America rose by 78% to $284 million.

Valuation

General Motors ended the third quarter with $26.8 billion in cash, equivalents and marketable securities for its automotive division, while the financing unit holds another $1.8 billion in cash and equivalents. GM holds a total of $32.8 billion in short and long term debt, including liabilities of the financing unit. This excludes the large pension liabilities on the balance sheet.

Revenues for the first nine months of the year came in at $114.94 billion, up 1.8% on the year before. Earnings for the period came in at $4.30 billion, down by 13.8%. GAAP net income came in at $3.04 billion. Note that revenues of almost $155 billion for the year should be attainable, while GAAP earnings should be able to come in around $4.5 billion.

Factoring in gains of 3%, with shares trading around $37 per share, the market values General Motors at $55 billion. This values equity in the firm at 0.35 times annual revenues and 12 times annual earnings.

General Motors does not pay a dividend at the moment.

Some Historical Perspective

GM was already in bad shape heading into the 2008 recession, as the company was reporting losses since 2005 amidst strong economic growth. What followed was the $49.5 billion bailout in 2009, on which the government is now facing losses of $10 billion.

General Motors, or often called "Government Motors" those days was quick to make its comeback on the stock exchange through a $20 billion public offering in 2010. At the time it sold shares to the general public again at $33 per share.

Stripped from many of its past liabilities, shares quickly moved up to $40 per share in 2010. Shares fell back to lows around $20 in 2011 and 2012, to steady re-gain lost ground again with shares trading around $37 per share at the moment.

Investment Thesis

GM reported solid earnings, although there are always some pluses and minuses within such a large conglomerate. Over the past quarter, worldwide sales hardly rose, while international earnings were impacted by extensive car recalls in India and Southeast Asia, a region within which GM furthermore faced tough price competition.

For now, the strength totally relies on the continued progress in North America, which is expected to strengthen through 2014 and 2015 with the new product line-up hitting the market. Note that profit margins already jumped by 160 basis points to 9.3% of revenues, approaching GM's target of 10%. Investors were also positively surprised with the further loss reductions in Europe, where it showed revenue growth on the year before and the company remains on track to break-even next year or the year thereafter.

Back in July of this year, I last took a look at GM's prospects. I concluded that GM lost a lot of its market domination and the favor of the public to Ford in the wake of the recession. Despite the fact that European activities are improving, and GM is being able to "free" itself from the government as shareholders, it is still dealing with large pension obligations. Fortunately, leverage concerns are far away given the huge cash balances over the firm.

Three months ago, I favored Ford (F) over GM given the similar valuation, the appealing dividend, faster current revenue growth and better goodwill with the US public. While expectations are high for GM's new product lines in the coming two years, which could spur earnings growth and GM's share price, the company still has a lot to prove to me. I still see some execution risks ahead, given the troubled historical performance.

I reiterate my stance, I continue to favor Ford over General Motors.

Source: General Motors - North America And Europe Drive Improvements