General Motors (GM) is the world's largest automaker. In some ways, GM could be considered to be a new company. The new GM is a smaller and much more profitable company than the old corporation that entered into bankruptcy in 2009. The current GM, has a market cap of $34 billion, and in 2011, the company had revenues of $150 billion.
Since GM emerged from bankruptcy, its earnings have been trending upward. However, in the first quarter, earnings were lower on a year-over-year basis. In the first-quarter earnings call, the company reported earnings per share of $0.60, which was a 195% decrease from earnings per share of $1.77 in the first quarter of 2011. The company had first quarter revenues of $37.8 billion, which was a 4.4% increase from revenues of $36.2 billion, in the first quarter of 2011. The company's first quarter net income was $1.3 billion, which was a 154% decrease from net income of $3.3 billion, in the first quarter of 2011. According to the New York Times:
Despite the overall earnings decline, GM surpassed analyst estimates that averaged 85 cents a share, excluding taxes, interest, the charge and other special items. On that basis, GM earned $2.2 billion, or 93 cents per fully diluted share, up from $2.0 billion, or 95 cents a share, a year ago.
GM's year-over-year earnings were lower because of two one-time transactions. The first transaction was the sale of its stake in Delphi Automotive (DLPH) in the first quarter of 2011. GM recorded a profit of $1.6 billion from the sale. In the second transaction, GM made a profit of $300 million from the sale of its preferred shares in Ally Financial. The main point that investors can take from GM's first-quarter earnings is that the company's earnings from day to day operations are improving.
Positives for GM as it moves forward
In June 2009, GM declared bankruptcy. However, the bankruptcy was short lived. The company emerged from bankruptcy on July 10, 2009. As a result of the bankruptcy, GM decreased in size and discontinued brands like Saturn, Hummer and Pontiac. GM has made incredible progress since the bankruptcy and is once again selling more vehicles than any other automaker. On Jan. 17, GM announced that it had sold 9,025,942 vehicles in 2011. That topped its second biggest competitor Volkswagen (VLKAY.PK), which sold 8.39 million vehicles, and last year's leader Toyota (TM), which is expected to report 2011 sales of around 8 million vehicles.
GM's top selling auto division was the Chevrolet division, which sold 4.76 million vehicles in 2011. GM's North American market had $1.7 billion in earnings before interest and taxes, which was a 30% increase from the $1.3 billion in earnings that it had in the first quarter of 2011. GM's Chinese market also performed well, and in the first quarter its earnings before interest and taxes was $500 million, from a record 745,000 vehicle sales. Chevrolet also increased earnings in other markets, such as Peru, where earnings were up by 81%, Vietnam were earnings were up by 79% and South Africa were earnings were up by 50%. The Chevy Cruze sold more than 670,000 vehicles globally and was the best selling car brand in the U.S.
In other positive news, GM is moving to shore up its pension plan, which was underfunded by $13.3 billion at the end of 2011. The company's 19,000 salaried workers, which have been covered by GM's pension plan, will be shifted to a 401(k)-type plan. GM is also benefiting from its revised labor contract with the United Auto Workers. As a result of the revised contract, hourly labor cost were cut to $5 billion per year, less than a third of the $16 billion the company paid in 2005. In an addition move to reduce labor cost, the company discontinued across the board pay raises to its 26,000 salaried employees. Lowering labor cost was pivotal towards GM goal of moving forward as a competitive and profitable company.
Negatives for GM as it moves forward
Many of the European countries that have adapted the euro as their currency are in recession. This situation has hurt GM's European sales. In the first quarter, GM's European unit lost $256 million and was responsible for $600 million in special charges for pension and goodwill writedowns. According to the New York Times, in 2011 "GM's European operations, mainly the Adam Opel unit based in Germany, lost about $580 million in the first nine months of 2011. During the fourth quarter alone, European operations lost $562 million." The 2011 loss marked the twelfth consecutive year in which GM"s European unit has lost money.
GM's pension plan was underfunded by $13.3 billion at the end of 2011, which was a 15.6% increase from 2010 when the plan was underfunded by $11.5 billion.
Despite the fact that GM has been making record profits, it still has not repaid the Federal Government bailout. GM received a bailout of about $49.5 billion, and it is estimated that it still owes the Federal Government about $25.5 billion. The Federal government, which took a 61% ownership share of GM as a result of the bailout, has frozen its CEO's pay until the bailout money is repaid. GM CEO Daniel F. Akerson is expected to earn $9 million in stock and salary this year.
The American auto industry, which also includes Ford (F) and Chrysler, whose majority owner is Fiat (FIATY.PK), has made an amazing comeback. GM has been able to participate in the comeback, because it is now a much more efficient and profitable company. Since its emergence from bankruptcy, GM's cost are lower, and its debt has been reduced. In the two years since the company emerged from bankruptcy it has increased its net income from $104 million to $9.2 billion.
While I admire GM's recent earnings growth, I would not recommend buying its stock. The stock price is down by 28% over the last 52 weeks and down by 22% since Feb. 17. In addition, GM does not pay a dividend, so there is no incentive to hold the stock. If GM's earnings continue to trend higher, investors will eventually regain confidence in the company and the stock price will improve. However, I would avoid investing in GM at this time. GM is currently trading around $21. Based on my analysis above, I expect the stock to dip to the $18 level by late 2012 before recovering.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.