From a growth perspective, General Motors' (GM) results were extremely disappointing. Revenue fell by 2.4% and profits fell by 13%. Most of the losses were propelled by declining revenues from European operations, especially the Opel unit in Germany. Bears point out that Ford (F), facing the same problems in Europe, has managed to post a rise of 17% in EPS. However, one needs to understand that GM has been restructuring its Opel unit under its Interim Vice Chairman Stephen Girsky. Therefore, the costs associated with restructuring have adversely impacted profits. The stock is only trading at a forward price to earnings multiple of 6x.
Despite a downfall in both revenues and profits, the company topped the Street's estimates. According to CFO Daniel Akerson, GM showed strong performance globally, with the exception of Europe.
GM, with the largest market share of 17.7%, was one of the main beneficiaries of the strong auto market in North America. Posting strong results, GM's performance in the US market in particular has surprised everyone. Its strength in the US auto market was reflected in the September SAAR figure, which turned out to be 14.88 million, well above the expected estimate of 14.5 million. However, its EBITDA of $1.8 billion from GMNA (North American operations) was less than the $2.2 billion earned last year. The US auto market has shown more resilience compared to other industries in the face of the global economic slowdown. GM gets almost 60% of its revenues from GMNA.
The company's European operations have not gone well for a significant period of time. GME (GM's European operations) have incurred losses of $17.3 billion since 1999. The company expects the loss for this year to be in the range of $1.5 billion to $1.8 billion. The company lost $0.5 million from GME, which was greater than the $0.3 billion lost in the same period a year ago. The company expects the situation to improve in 2013 and GME to break even in 2015, which is quite similar to what Ford expects from its European operations. We have already discussed GME in detail in one of our earlier articles. Bears believe that GM may be too small to restructure operations in the way Ford has done. This comment is plausible to a certain extent, given that Ford's market share is more than that of GM in Europe. However, it is too early to make any definite conclusions. GM, under Akerson, seems determined to bring a change.
Fiat's CEO Marchionne is said to have proposed collaboration between Fiat, Peugeot and GM in Europe in order to overtake Volkswagen (VLKAF). VLKAF currently has a 25% market share. Combining the sales of the three auto manufacturers will also formulate a 25% market share. Also, in the conference call, the management declared that it plans to bring down fixed cost at GME. The company has already reduced fixed costs by $300 million in the last twelve months. One of the cost-saving policies was a 2,600 headcount reduction this year. The target, if achieved, is expected to bring down fixed costs by $500 million by 2015.
GMIO (GM's Asian operations including China) improved its earnings from $0.4 billion to $0.7 billion YoY. GM's operations in China have generated lesser sales than expected. The weak economy has put pressure on pricing strategies. Gains have come from other regions. Also, the sales from Chinese operations would have been even less had the anti-Japanese tensions not taken place in China. These protests have deeply affected the sales of Japanese manufacturers such as Toyota, Honda and Nissan.
GM offered buyouts to about 36% of its salaried workforce. Around 30% of the retirees who were offered the buyouts took the lump-sum payment. Through the lump-sum payment, the company will be able to reduce $29 billion in its pension liabilities. Pension liabilities of $134 billion have been a concern for investors because it directly affects debt-ratings. Not only this, the funds fluctuate with movements in factors like interest rates and life expectancy of pensioners. GM plans to hand over the assets and obligations of its pension program to Prudential Financial Inc. (PRU) through the purchase of a group annuity contract.
There were some other important points made by the CEO in the conference call. The results for Q4 are expected to be close to or slightly better than 4Q2011. The company is well on its way to conduct the biggest product launch since its inception. It plans to introduce 23 new vehicles and 13 new engines by 2016. Currently, there is a 400 basis point margin between Ford and GM. GM has planned to bridge that gap by launching newer models, (most of the gap has been caused by Ford's truck range, which is sold at a greater premium than GM's truck product line) and cutting SG&A expenses e.g. the recent IT in-sourcing activities.
The stock is trading at a cheap multiple of 6x. The company has been actively planning to strengthen its world-wide operations. One of those plans was the restructuring that took place recently, in order to shift power from regions to the center. The biggest drag on GM's resources is the state's stake of 32%. The treasury wants to at least reach breakeven on the bail-out money injected in GM. Break-even will be achieved when the stock climbs to $53. The current management is bullish about the future of the company. Given that its massive product launch and European restructuring plan bring the intended results, the stock is expected to rise in the future.