At first glance investors would believe that General Motors' (NYSE:GM) 3rd quarter was quite impressive. The company met top-line expectations with $36.7 billion and exceeded bottom-line expectations with $1.7 billion income and an EPS that beat the street by $0.07. Yet despite the strong numbers the stock trended lower by nearly 11%. Therefore with such a strong reaction to earnings let's look at the quarter to see what caused investors to become so discouraged with GM's quarterly results.
I believe the loss is a result of two factors: Europe and its pension obligations. During the quarter GM posted a loss of $300 million in Europe, which has been a problematic region for GM. In addition the company had originally believed it would achieve profitability in Europe by the end of year. However it now believes that Europe will most likely post a loss in Q4. And maybe I am failing to see the entire picture but I don't understand what investors expected out of Europe. If I'm not mistaken Europe is enduring perhaps the worst financial crisis in its history, therefore why would investors expect for GM to perform well in the region? Nearly every company that has any presence in the eurozone has fallen over the last three months and has experienced disappointing earnings within the European regions. And although this news affected the company's margins, which fell from 6.7% to 6%, I believe that investors should be judging the progress by sales, which accounted for an additional $1 billion in revenue year-over-year.
The pension plan was an update that investors were expecting during the earnings report, however, GM did not give any updates. Therefore investors naturally assumed the worst-case scenario, that GM failed to update because the deficit has increased. However GM updates its pension on a yearly basis after Q4, which means there is no reason to speculate that the company didn't comment on a topic that was not scheduled to be discussed.
The pension update and the weak sales in Europe are the only issues that I can find with General Motor's earnings report that would cause a negative reaction of its stock. However these two issues do not justify the 11% loss that took place after earnings were announced. The company's earnings were solid and although it was nothing spectacular one could argue that based on its stock position the market wasn't expecting anything remarkably solid. The stock is trading with a P/E under 5 and has lost 30% of its value over the last six months with virtually no discouraging developments. I believe the company is full of promise and because of its weakness in Europe investors should be encouraged of its ongoing growth in North America and China. The company has reinvented itself with fuel-efficient vehicles and has significantly increased its sales in utility vehicles among others. The company's Chevrolet Cruze has maintained monthly sales near 20,000 as a vehicle that attracts the consumer seeking performance, fuel-efficiency and design. The company is creating vehicles that save the consumer money and with a new line of models such as the Sonic and Volt that are rapidly increasing in sales I believe that GM will show unprecedented growth as it continues to create products that are a necessity to saving the consumer money. And since the stock has traded lower on 3 of its last 4 earnings reports, despite beating expectations, it shows that investors are simply difficult to satisfy regarding this company.
Yet my theory is that a growing company with solid products can only trend lower for a short period of time before the growth and progress of the company starts to shine, which means this stock may be trending lower today but will post massive gains for the investor who takes advantage of its illogical trend.
Disclosure: I am long GM.
Disclaimer: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy but rather informational purposes only.