We profiled General Motors Co. (GM) several months ago, and after today's earnings report, we wanted to provide an update. General Motors announced second quarter net income of $1.5 billion, or $0.90 per fully diluted share, beating consensus of $0.74 per share. This was down from $2.5 billion, or $1.54 per share, a year ago. Revenue of $37.6 billion was down from $39.4 billion YOY, largely due to a strengthening of the U.S. dollar versus other major currencies. EBIT of $2.1 billion was off from $3 billion YOY, and automotive net cash flow from operations was $3.86 billion in the quarter, down from $5 billion YOY. Automotive free cash flow was $1.7 billion, down from $3.8 billion for the same time last year. GM's problems are primarily related to Europe and, to a lesser extent, South America.
GM North America (GMNA) posted adjusted-EBIT of $2.0 billion, down from $2.2 billion YOY.
GM Europe (GME) posted adjusted-EBIT of $(0.4) billion, compared to $.1 billion YOY.
GM International Operations (GMIO) reported adjusted-EBIT of $0.6 billion, flat YOY.
GM South America (GMSA) reported breakeven results on an adjusted-EBIT basis, compared with $0.1 billion YOY.
GM Financial reported adjusted-EBIT of $0.2 billion, up from $0.1 billion YOY.
GM's corporate segment reported adjusted-EBIT of $(0.2) billion, of which $(0.1) billion was attributable to a non-cash foreign exchange loss.
European losses are the biggest overhang for GM's business right now, and the company is attempting to restructure operations significantly through cutting SG&A expenses, and leveraging procurement to reduce cost of goods sold. Earlier in the year, GM invested more capital into one of its European partners Peugeot S.A. (PEUGY.PK), and the purpose of the investment is to reduce costs through combining purchases, enabling greater scale.
GM's European operations have been losing money for a decade now, and at this point, it seems like the prudent decision would have been to divest these operations as part of the bankruptcy process. Moving forward without the benefit of hindsight, GM must take radical steps, which could likely require shutting plants down, or divesting some of the brands if given an opportunity. European economic issues are affecting all automotive manufacturers, but GM's brands, like Opel, aren't strong enough in the region to ensure success, even in a better environment. It would be very difficult to get out of Europe at this point in the game, so anything GM can do to reduce losses until the macroeconomic picture clears up should be seen as a bonus.
Total worldwide market share was 11.6% in 2Q 2012, down from 12.3% YOY, with small declines across most of the major different geographic markets. Much of this was to be expected due to the re-emergence of the Japanese manufacturers, whose production was disrupted after the tragic earthquake last year. GM has very strong market share in North America, China, Russia, and Latin America, which is where I'd expect to see the majority of future profits derived from.
On the conference call GM's management discussed the opportunity in China, where the market could possibly support 30 million in annual automotive sales by the end of the decade. While China is a bright spot for GM, Latin America has turned into a bit of a problem, as GM is a higher-cost operator than some of its competitors in the region. That is because it has manufacturing facilities located in more expensive areas around Sao Paulo. Management believes that they should be able to cut SG&A expenses by $75-$100MM throughout GMSA. Latin America is an essential market for GM, and the company has invested heavily to introduce and renovate brands in the region, and it hopes those efforts will spur sales growth.
GM is investing heavily in its brands. In North America, 70% of the product lines will be new or redesigned over the course of 2012 and 2013. Cadillac and Chevrolet have been leading the pack in terms of sales growth and momentum from new designs and marketing initiatives. GM expects U.S. light vehicle sales of 14-14.5 million this year, and adjusted-EBIT in North America in Q3 should be fairly consistent with Q1 and Q2. The average age of vehicles on the road continues to be the oldest on record, therefore, there is a tremendous amount of pent up demand, which should continue to spur sales growth over the next several years.
GM ended the quarter with $32.6 billion in automotive cash and marketable securities, and total automotive liquidity of $38.5 billion. Due primarily to retained earnings, GM has grown shareholder equity to $41.6 billion from $38.99 billion on December 31, 2011. The book value of GM's debt is $5.1 billion, and there is $5.5 billion of Series A preferred stock. The U.S. qualified pension plans are underfunded by $12.8 billion at the end of the second quarter, and non-U.S. pensions are underfunded by $11.2 billion at the end of the second quarter. Lastly, the OPEB liability is $7.2 billion.
While GM's been posting strong profits and strengthening the balance sheet, the stock has performed miserably. At $19.14, GM sits just above its 52 week low of $18.72, with a market cap of $30 billion. Even with its European problems, GM easily has $6-9 billion in normalized earnings power, with upside beyond that. No mandatory U.S. pension contributions are expected until 2017, and GM is taking aggressive steps to reduce the pension shortfall. One of Berkshire Hathaway Inc.'s (BRK.A, BRK.B) investment officers, believed to be Todd Combs, bought a nice slug of the stock around $25 a share, offering investors the opportunity to get in at significantly cheaper prices today.
While economically sensitive stocks like GM seem to be moving primarily with macroeconomic data flows as opposed to business performance, patient investors can use this manic state of affairs as an accumulation period, which will eventually lead to investment profits. It seems like it may take some time for the government to divest itself from its large ownership stake in GM, and European problems are not likely to be resolved in the next year. GM must continue to aggressively resolve the pension concerns, and work towards scraping out more cost savings to offset the weak economic conditions. Once the smoke eventually clears, I'd expect GM's stock to be trading 50-100% higher than current prices several years from now. Investors must be extremely patient. Volatility is to be expected, so an aggressive dollar cost averaging program is advisable.