This morning General Motors (GM) reported its fourth-quarter results for 2011 and ended the year with the highest profit on record of $7.6 billion. This is remarkable performance for a company that was in bankruptcy only two short years ago. The company's fourth-quarter earnings are as follows:
- Revenue in the fourth quarter of 2011 increased 3 percent to $38.0 billion, compared with the fourth quarter of 2010. GM's fourth-quarter 2011 net income attributable to common stockholders was $0.5 billion, or $0.28 per fully diluted share, including a net loss from special items of $0.2 billion or $0.11 per fully diluted share.
- In the fourth quarter of 2010, GM's net income attributable to common stockholders was $0.5 billion, or $0.31 per fully diluted share, including a net loss from special items of $0.4 billion or $0.21 per fully diluted share.
- EBIT-adjusted was $1.1 billion in the fourth quarter of 2011, compared with $1.0 billion in the fourth quarter of 2010. Fourth-quarter EBIT-adjusted for 2011 includes the impact of restructuring charges of $0.3 billion.
- GM's fourth-quarter 2011 special items include impairment charges related to goodwill and GM's investment in Ally Financial, and gains related to the Canadian Health Care Trust (HCT) settlement, the reversal of deferred tax asset valuation allowances in Australia and the extinguishment of debt.
Though these results narrowly missed analyst expectations, the real story is where these earnings are coming from. The answer is solely North America. Due to the fact that GM is beginning to lose large sums of money in its international division, the company may be heading down a path where if the United States were to fall back into recession, GM could be brought to the brink once again. Even with stellar performance this year and the company's incredible comeback, GM may have a major problem on its hands - the world outside of the United States.
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Where the $7.6 billion gain is coming from:
As mentioned above, the record profit delivered today was a result of the company's North American operations being efficient. Another part of this story is that the U.S. economy has improved over the last year and GM has put substantial amounts of money into the development of its new lines of automobiles. In North America, the company reports:
GM North America (GMNA) reported EBIT-adjusted of $1.5 billion in the fourth quarter of 2011 compared with $0.8 billion in 2010. Full-year EBIT-adjusted was $7.2 billion in 2011 compared with $5.7 billion in 2010.
These are strong EBIT-adjusted earnings on nearly anyone's scale of success. The story for the rest of the world is quite different, though. In South America and Europe, the company continues to report loses and this stems from brands like Opel continuing to lose market share and bring in loses for the company's international devision. The results are as follows:
- GM Europe (GME) reported an EBIT-adjusted loss of $0.6 billion in the fourth quarter of 2011, including $0.2 billion of restructuring costs, matching last year's results. Full-year EBIT-adjusted was a loss of $0.7 billion in 2011, an improvement of $1.3 billion over 2010.
- GM International Operations (GMIO) reported EBIT-adjusted of $0.4 billion in the fourth quarter of 2011 compared with $0.3 billion in 2010. Full-year EBIT-adjusted was $1.9 billion in 2011 compared with $2.3 billion in 2010.
- GM South America (GMSA) reported an EBIT-adjusted loss of $0.2 billion in the fourth quarter of 2011, including $0.1 billion in restructuring costs, compared with EBIT-adjusted of $0.2 billion in 2010. Full-year EBIT-adjusted was a loss of $0.1 billion in 2011 compared with EBIT-adjusted of $0.8 billion in 2010.
Even though improvements may be occurring, these figures are disturbing from an investor perspective due to the nature of the global economy. Investing in GM at this point is betting that these divisions are able to pull themselves back to profitability. The evidence is not clear-cut that this will commence.
What the company is saying and what it means for 2012 and beyond
The 2012 and beyond outlook that the company is expecting is not full of gloom as it was several years ago, but it is essential for investors to read between the lines and realize what the past can teach us about today. In 2008, GM was brought to its knees due to a "perfect-storm" that was both its fault and a result of external-economic factors. Today, America is slowly rising out of its economically recessed state, but Europe and other parts of the world are not. The European debt crisis has the potential to bring many countries that GM operates in to their knees. This would have a substantial impact on GM's earning potential. The company's Chief Financial Officer, Dan Ammann states:
We are executing an aggressive product plan that will give customers around the world even more reasons to purchase a General Motors vehicle…Behind the scenes, we are working hard to eliminate complexity and cost throughout the organization to increase margins in all of our regions, and return Europe and South America to profitability. Overall, we have made good progress and we have more work to do.
The problem lies in the fact that investors need to see tangible proof that if a global recession were to breakout, GM would have the nimbleness to react and minimize loses that could bring the company back to a more vulnerable state. This does not account for the potential the company has for its North American operating division to be impacted by domestic economic problems. Although GM is out of the woods in regards to stabilizing an operation that is no longer in danger of bankruptcy, from the words of the company, "there is a lot more work to do."
Between the foreign automakers and Ford (F), GM has stiff competition to keep up with. Earlier this month, F reported its fourth-quarter earnings along with evidence that its "OneFord" plan implemented several years ago was yielding fruit. The company's CEO Alan Mullany stated,
I think that we have a great plan in the United States and Europe and also a tremendous growth plan in Asia-Pacific that's just coming on line now.
The problem with GM is that this type of outlook has not been presented. Although F would fall under the same pressure if Europe and other parts of the word fell into recession, it is more apt to be nimble than GM due to its recent efforts. Foreign automakers like Toyota (TM) and Honda (HMC) experienced declining unit sales due to the Japanese earthquake and Toyota's quality issues. When these foreign automakers continue to improve, this will give GM fiercer competition and a more difficult environment to thrive in.
Financials Are One Bright Spot
- Forward price/earnings: 6.94
- PEG: .41
- Enterprise Value/EBIDA: 1.57
- Cash-Debt: 20.29
- Dividend: 0%
This financial data illustrates that GM is valued very fairly and is trading below the industry average in nearly every metric. This gives investors in GM an advantage due to the low valuation, but if a solid long-term strategy is not in place or competition becomes too fierce, there is little evidence the stock price will stay constant due to a low valuation.
Conclusion: Due to the aforementioned reasons, GM is not currently in a precarious situation, but the company's performance outside of North America is concerning. Though the company has improved its non-domestic performance, if a global recession were to commence, GM does not appear to be positioned as well as its largest rivals. Until the company shows a stronger trend of earnings around the world, GM's outlook is not certain.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.