It has been a crazy couple of days for General Motors (GM). On August 1, GM released its monthly sales figures for July and on August 2, it released its operational results for its second quarter of fiscal year 2012. Let's start with the monthly auto sales figures first. Total sales declined 6.4% to 201,237 from 214,915 in July of 2011.
Management was quick to blame the rebound in Toyota (TM) and Honda (HMC) for the decline. In March of 2011, Japan was crippled by an earthquake and subsequent tsunami, which hindered production and caused inventory shortages around the globe. Ford (F) (click here for Ford's monthly sales reaction) and GM were two of the main benefactors following the tsunami, but Honda and Toyota have been winning back that lost market share ever since.
Highlights from the monthly sales release:
- Cadillac sales increased 20.7% year over year, with the CTS, Escalade, and SRX logging strong gains for the month. Note: year to date sales are down 12.6% for Cadillac.
- Only three models (DTS, Escalade EXT, and STS) saw declining sales compared to July of 2011.
- Sales to rental fleets (lower margin sales) were down 41%.
- Sales of the Chevrolet Volt electric car rose more than tenfold to 1,849.
- Sales of the new Chevrolet Sonic subcompact remained strong at 6,278.
The negatives outweighed the positives during the month.
- Sales of Buick (-14.7%), Chevrolet (-6.8%), and GMC (-9.0%) all declined during the month.
- Sales of the Chevy Silverado declined 12.5% during the month, but are still up 3.5% for the year.
- Aside from the Buick Verano (which wasn't sold during July 2011), sales of the Enclave (-29.0%), La Crosse (-33.0%), and Regal (-49.4%) all declined compared to July of 2011.
- Inventory levels continued to increase, with total inventory increasing to 79 days of supply compared to 76 at the end of June.
Through the first 7 months of 2012, GM's sales are averaging a 2.7% gain, but the success of the stock will continue to be dependent on China and Europe. North America is progressing extremely well, much better than my expectations.
That brings me to the second quarter earnings release. The headline was great for GM, as it earned $0.90 per share, compared to the $0.74 per share the Street was expecting. However, GM's net income fell 41% to $1.5 billion, $1 billion less than the same quarter a year earlier. On the top line, GM reported that revenues slipped 4.5% to $37.6 billion from $39.4 billion, due primarily to the 21.0% drop in Europe. The following table outlines GM's revenues by segment.
GM International Operations (GMIO), which includes China, saw sales improve 8.5% year over year. This is a big bright spot for the country as the hopes for the future of GM rest solely on this second largest segment. During the quarter, GMIO accounted for 18% of revenue, up from 16% of revenue in the second quarter of 2011 (and 16% from the first quarter of 2012).
The biggest problem I have with China being the future of GM is the profit margins. As a result of every foreign automaker operating in China needing a domestic joint venture partner, GM only gets to keep approximately 50% of its profits.
The thorn in every automaker's side right now is Europe. Through the first six months of the year, GM has lost more than $617 million in Europe. During the second quarter, sales declined 21.0% year over year, while the segment swung to a $361.0 million loss (compared to income of $102.0 million in 2Q11). CFO Dan Ammann can't even say with any degree of certainty when the segment will turn profitable again.
I know you are thinking that the messes that are the economies in Europe are sure to absorb the blame, and the answer is absolutely! The economies across Europe account for the macro economic outlook, but GM had problems in Europe long before the economies started to decline. Europe will continue to be a nuisance for the industry, with GM in particular because its uphill battle is so much steeper than many of its competitors.
Shares of GM are down almost 6% year to date, while Ford is down more than 17%. Just looking at that, you would think that GM has been doing better than Ford this year, however, the government still owns more than 30% of General Motors and that acts as a floor for shares to fall (it also acts as a ceiling). Looking at other valuations such as PE ratio, price to sales, and price to free cash flow, you could make an argument that GM is grossly undervalued.
However, I do not see a reason for GM's financials woes to be turned around. Will the Company continue to sell cars around the world? Yes. Will GM continue to be one of the three largest automakers in the world? Yes, again. But I do not see a growth story here. I like Ford better for that reason. Ford has a better vehicle lineup in my opinion, and more flexibility with production. The Chevy Volt continues to gain traction, but management has consistently dropped the ball while managing the electric vehicle.
If you are a long-term investor, and I mean really a long-term investor (not someone that is going to hold for 12 months and watch the stock price everyday), then GM may be an attractive investment. The US, Chinese, and European auto markets will rebound (the US and China before Europe), and GM could see a rebound with it. However, until the government offloads its ownership stake, GM will continue to be in a range bound between $18 and $26.