General Motors' Earnings Disappointed Me

May.26.14 | About: General Motors (GM)

Summary

Revenue increased by 1% but earnings depleted by 89%!

Nowadays it seems like if there is a day in the week that ends in "day" there is another GM recall.

The company better get its act together on the quality front or it could mean another meltdown.

The last time I wrote about General Motors Company (NYSE:GM) I stated:

"Due to the bearish technicals, falling financial efficiency ratios, and reduced 2015 earnings estimates, I will not be adding to my position right here." Since that article was published the stock is down 3.75% while the S&P 500 (NYSEARCA:SPY) is up 0.64%. General Motors designs, builds and sells cars, trucks and automobile parts globally.

The company reported earnings before the market opened on 24Apr14 and on the surface the results were mixed with the company reporting earnings of $0.29 per share (beating estimates by $0.08) on revenue of $37.4 billion (missing estimates by 1.03 billion). The stock decreased 0.64% the day it reported earnings and what I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenue (millions)

1Q14

1Q13

Y/Y

Automotive

$ 36,315

$ 36,344

0%

GM Financial

$ 1,093

$ 540

102%

Total

$ 37,408

$ 36,884

1%

Click to enlarge

Compared to last year, total revenue has increased by 1% for the first quarter. The only real notable thing about this portion of the earnings report is that Automotive revenues were flat for the year and accounts for roughly 97% of the company's revenues. The 102% decrease in GM Financial is immaterial as it only accounts for 3% of revenues.

Income Statement

Income Statement

1Q14

1Q13

Y/Y

Revenue

$ 37,408

$ 36,884

1%

Automotive cost of sales

$ 34,127

$ 32,617

5%

GM Financial operating and other expenses

$ 875

$ 356

146%

Automotive selling, general and administrative expense

$ 2,941

$ 2,952

0%

Total costs and expenses

$ 37,943

$ 35,925

6%

Operating Income

$ (535)

$ 959

-156%

Automotive interest expense

$ 103

$ 91

13%

Interest income and other non-operating income, net

$ 89

$ 171

-48%

Equity income

$ 605

$ 555

9%

Income before income taxes

$ 56

$ 1,594

-96%

Income tax expense

$ (224)

$ 409

-155%

Net income

$ 280

$ 1,185

-76%

Net income attributable to noncontrolling interests

$ (67)

$ (10)

570%

Net income attributable to stockholders

$ 213

$ 1,175

-82%

Less cumulative dividends on preferred stock

$ (88)

$ (215)

-59%

Less undistributed earnings allocated to Series B Preferred Stock participating security

$ -

$ (87)

-100%

Less earnings adjustment for dilutive stock compensation rights

$ (17)

$ -

N/A

Net income attributable to common stockholders

$ 108

$ 873

-88%

Avg. Diluted shares

1,691

1,507

12%

Earnings Per Share

$ 0.06

$ 0.58

-89%

Click to enlarge

With the 1% increase on the top line I'd expect the bottom line to exhibit the same characteristics but it didn't, the bottom line showed a horrendous drop. I'd like to see why that was the case by diving into the income statement. We immediately see a 146% increase to GM Financial operating and other expenses with total costs and expenses increasing 6%, making operating income decrease a whopping 156% from last year! Automotive interest expense increased 13% while interest income decreased 48%, which helped income before taxes increase a bit, but still showed a 96% drop from last year. Income tax expense decreased by 155%, helping net income but still showed a 76% drop from last year. Net income attributable to noncontrolling interests increased by 570% but is negligible on an absolute value. Net income decreased 82% from last year but after taking into consideration some non-GAAP items net income dropped by 88%. After a 12% increase to dilutive shares investors received an 89% drop in earnings when compared to last year.

Conclusion

The company reported earnings which were 89% lower than a year ago on 1% more revenue while the share price was down 7.22% since the last earnings call. These were bad results to me because I don't like to see flattish revenue and definitely don't like to see a drop in earnings. The stock is one of the larger positions in my dividend portfolio but I can guarantee that there will be other stocks looked at first before I think of buying into this name again. That being said, I think the stock is inexpensively valued but earnings estimates keep decreasing. Only when I see next year's earnings estimates begin to flatten out will I buy more of the stock. With these results the stock is on my team but at the back end of the bench.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long GM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.