General Motors: Earnings Beat But Potholes Still Abound

| About: General Motors (GM)

Before the opening bell on May 3, General Motors (NYSE:GM) released operational results for its first quarter of fiscal year 2012. The results surpassed the Street's expectations on both the top and bottom lines as pricing power in North America helped to offset the weakness in Europe. General Motors reported earnings of $0.93 per share (excluding items) on revenue of $37.8 billion, compared to Street estimates of $0.85 per share and $37.59 billion, respectively.

General Motors saw revenue increases across the board, save for GM Europe (GME), which saw a whopping 19.8% decline. The problems in Europe are no secret as they have hindered General Motors for years, long before the company went bankrupt. The former vice chairman of General Motors, Rob Lutz, was on CNBC discussing the quarter, and he said it is a market-wide problem, not a company specific one. He was referring to Europe, and I am inclined to agree with him right now. However, Opel and Vauxhall (General Motors' brands in Europe) have been pressured for years, long before the latest economic slowdown began. The following table outlines the segment's results for the first quarter.


Q1 2012

Q1 2011

% Change

















GM Financial




Total Revenue




One of the most positive signs for the company was the pricing power it saw in North America. General Motors, along with Ford (NYSE:F), lost market share in North America as a result of not incentivizing its vehicles. But both companies have indicated they would be happy to sacrifice a few market share basis points to have more pricing power, which in turn increases resale value. Results for General Motors North America (GMNA) fell below expectations. GME continued to be weak and swung to a loss during the quarter, losing $256.0 million over the past three months. In General Motors South America (GMSA), revenues were only up slightly as increased competition slowed growth. EBIT declined almost 10% year over year to $529.0 million. General Motors International Operations (GMIO), the segment that includes China and its joint ventures, saw revenues improve 16.4% year over year, while EBIT declined 7.8% and it had an EBIT margin of 1.4%.

The problems in Europe have been well documented and CEO Dan Akerson and CFO Dan Amman have indicated that a restructuring plan is finally in the works, but Amman indicated that it would be a slow process. In other words, there will be no Band-Aid to pull off. While I respect the long-term approach to fixing this problem, I would like to see some sort of improvement. Why has it taken this long, after the problems in Europe began, to finally decide to potentially close one or two factories in Europe to deal with overcapacity? Europe will continue to be a black hole for General Motors until the market turns around there. While other automakers may be able to squeeze out some improvements, General Motors is waiting for the market.

The company improved its operating margin in North America to 7%, from 5.6% a year ago, above the 5% figure that U.S. automakers once considered acceptable. Rival Ford's operating profit in its North American unit rose 16% to $2.1 billion, giving it a profit margin of 11.5% for the region.

Not only is General Motors lagging behind Ford in terms of revenue growth and operating income growth in North America, it is seeing its market share dwindle and is struggling match production with demand around the world. I am not a fan of General Motors, and this quarter's results do nothing to assuage my fears. Earlier this year, General Motors purchased part of Peugeot (OTCPK:PEUGY), and now General Motors is in talks to purchase part of Isuzu (OTCPK:ISUZY). The original plan was to purchase the whole thing, but General Motors is pulling back slightly. I am getting a sense of déjà vu with these purchases. There was a wave of consolidation in the industry, but that was a huge problem for automakers. Ford sold Jaguar, Land Rover, and Volvo (all companies it purchased in the previous 10 years), while General Motors offloaded Hummer, Pontiac, and Oldsmobile -- among others -- because the costs were too much.

General Motors needs to fix Europe, get current on its pension liabilities, and then get the government out of its boardroom. Only then will the company potentially become a good investment. The fact that the government owns more than a third of the company puts a ceiling on any type of upward movement. However, it is not that the government owns 33% of General Motors that has caused its stock to fall. It is because the company doesn't have the car lineup, the growth potential, or the balance sheet to warrant a higher valuation.

Case in point is the troubles with the Chevy Volt. General Motors slashed production for four weeks in March and April to get rid of some backlogged inventory, and announced a three-week shutdown during July (instead of the normal two-week summer shutdown). The Volt was expected to sell close to 40,000 vehicles per year, but during 2011 it sold just 7,671 and year to date, General Motors has sold 5,377 Volts. The future of General Motors was pegged on the Chevy Volt and China. The Volt continues to run into problems, while in China the company has a 15.1% market share but is forced to operate in a joint venture, so its profit margin is cut in half.

I am still not convinced General Motors has turned the corner. That being said, I do like that the company is looking for a long-term solution to its problems and not just trying to placate shareholders and Wall Street.

Disclosure: I am long F.