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General Motors Company (NYSE:GM) is scheduled to announce its Q2 earnings on August 2. The North American and Chinese operations continue to do well but Europe remains a worry. Just like Ford Motors (NYSE:F), GM has been struggling with overcapacity issues in Europe. In the first quarter, the company posted operating losses of $256 million for the region. As per recent reports, GM is only using 66% of its total capacity in Europe.

But, like Ford, GM has trouble shutting down excess capacity in the region as the strong labor and trade unions make it almost impossible to close down plants. It has decided to close its Opel plant in Germany at the end of 2016. GM’s vehicle sales for the first six months of the year are down 11%. Since emerging from bankruptcy in 2009, GM’s Opel has lost more than $3.5 billion.

GM Trying its Best

GM even changed its Opel CEO and appointed restructuring specialist Thomas Sedrin as new CEO in the hope of reviving its European operations. GM’s Chevrolet also signed a deal as high as $600 million with soccer giant Manchester United. But the sponsorship news was overshadowed by the ouster of its global marketing chief Joel Ewanick after it was alleged that he did not disclose the financial details of the deal properly to the company.

Earlier in the year, GM also signed a partnership deal with PSA Peugeot Citroen, in which the companies plan to share R&D costs and build vehicles on a common platform, a move that could help GM save $2 billion annually. But it will take some time before these moves can have any significant effect on GM’s European operations. If the European losses bottom out in the short term, the markets will have greater faith in GM’s profit generating ability.

We currently have a Trefis price estimate of $27.50 for General Motors’s stock. We will update the stock price estimate after Q2 earnings are released.

Strong North American and Chinese Quarter

GM’s vehicle sales in the U.S. were up 11% and 15.5% in May and June, respectively. April sales were negative due to the unusually high number of cars sold in the same month in 2011 (because of supply chain disruptions of Japanese automakers). The U.S. auto market has rebounded strongly this year, and the automakers now estimate the total auto sales in the country to be in the territory of 14-14.5 million, a rise from the beginning of the year projection of 13.5-14 million. North America’s operating profit grew 34% to $1.7 billion in the first quarter.

Similarly, the Chinese vehicles sales grew 21% and 10% in May and June, respectively. We reckon GM’s Chinese operations are the most important component of its profitability and that the segment contributes almost 38% to the stock price, as per our estimates. GM’s Chinese operations primarily comprises three joint ventures: Shanghai General Motors Co., Ltd. (SGM), SAIC-GM-Wuling Automobile Co., Ltd. (SGMW) and FAW-GM Light Duty Commercial Vehicle Co., Ltd. (FAW-GM). Equity income derived from these joint ventures stood at $529 million in the first quarter.

Disclosure: No positions

Source: GM Earnings Preview: North America And China To Drive Growth