General Motors - Solid Quarter, Little Appeal Remains

| About: General Motors (GM)
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Shares of General Motors (NYSE:GM) are approaching their highest levels since their bankruptcy after going public again in 2010.

While the company says it is "poised" for growth as it will launch one of the biggest waves of new models, I would prefer an investment in Ford (NYSE:F) over General Motors on the back of higher current growth rates, a stronger balance sheet, superior profitability and attractive dividends.

Second Quarter Report

General Motors generated second quarter revenues of $39.1 billion, up 4.0% on the year before, and ahead of consensus estimates of $38.6 billion.

The company shipped 2.5 million vehicles over the past quarter, up 4% from last year. Automotive revenues made up $38.2 billion for the quarter, with the majority being generated by the financial division.

The company reported a 20% slump in quarterly income to $1.20 billion. Earnings per share fell from $0.90 last year to $0.75 per share over the past quarter.

GM took special charges of $0.09 per share which weighed upon second quarter earnings. Adjusted earnings of $0.84 per share comfortably beat consensus estimates of $0.77 per share.

Adjusted EBIT rose by almost 10% to $2.3 billion, coming in at 5.8% of total revenues. This is up 20 basis points on the year before.

CEO and Chairman Dan Akerson commented on the developments over the past quarter, "We continue to perform well in the world's two most important markets, the U.S. and China. We also made further progress in our European business and saw the steady performance of our global brands Chevrolet and Cadillac. For the rest of the year, we'll focus on winning customers with high-quality vehicles at a compelling value."

Looking Into The Results

The US remains the main market for GM. Total revenues rose some 9% compared to last year reaching $23.5 billion. Despite the solid revenue development, operating income rose by merely 4% to $1.98 billion. Operating margins fell slightly to 8.4% of total revenues. The company still targets operating margins of 10% by 2015.

The European activities continued to contract, reporting a 7% decline in revenues to $5.2 billion. Impressive were the cost reduction measures as operating losses narrowed from $394 million last year to just $110 million over the past quarter.

Other international activities had a rough quarter as well, partially driven by unfavourable exchange rate movements. Revenues fell by 11% to $5.2 billion. Profitability of the business fell from $627 million towards $228 million on the back of the one-time charges in Korea.

The operations in South America reported healthy revenue growth of 5%, with total revenues coming in at $4.3 billion. Operating income came in at a paltry $54 million.


General Motors ended its second quarter with roughly $27.0 billion in cash, equivalents, restricted cash and marketable securities. The company operates with $4.0 billion in automotive debt and $22.8 billion in total debt related to its financing activities. While a rise in stock markets and discount rates brought some relief, GM still holds $26.7 billion in underfunded pension obligations on its balance sheet.

Revenues for the first six months came in at $76.0 billion, a touch higher compared to last year. Net income attributable to shareholders fell to $2.16 billion, mainly on the back of higher income taxes. At this rate, annual revenues of $150 billion and earnings of $4-$5 billion should be attainable.

Trading around $37 per share, the market values GM at roughly $61 billion. This values the company at 0.4 times annual revenues and roughly 13-14 times annual earnings.

GM does not pay a dividend at the moment.

Some Historical Perspective

General Motors was already in terrible shape heading into the 2008 recession. Ever since 2005, the company was reporting full-year losses despite a thriving US economy. The company received a $49.5 billion bailout in 2009, prompting many to rename it into "Government Motors."

As early as 2010, the company returned to the market in a massive $20.1 billion public offering, allowing the government to recoup a portion of its investment in the company. Yet shares would have to be issued at $48 per share for the government to break even, instead they were offered at $33 per share.

While shares initially moved upwards toward $40 per share, they had quickly fallen to lows around $20 at the end of 2011 and in the summer of 2012, on worries about a global economic slowdown and widening European losses. The continued improvements in the US market and cost cutting efforts in Europe are sorting effect, prompting shares to nearly double again towards $37 per share.

Investment Thesis

General Motors is no longer dominating the car market as it used to do. Its competitor Ford has received a lot of credits for navigating away from bankruptcy during the crisis. Both companies are on track to generate revenues of around $150 billion for 2013, and share prices of both companies are thriving on the strong US car market, narrowing losses in Europe and continued improvements in South America and Asia.

GM is making quicker progress than Ford in Europe. Unlike Ford, which grew its European revenues, GM is reporting lower revenues in the continent but is rapidly approaching break-even levels. Another positive sign is that operating improvements allow the company to repurchase the remainder of the government stake in the business.

While the bankruptcy stripped GM from a lot of obligations, it still carries around a lot of debt, among others, the massive underfunded pension liabilities. Yet this time, the company has access to enormous piles of cash and liquidity, making this leverage hardly a concern in the short run.

Still I would prefer an investment in Ford over GM. Both companies are reporting revenues around $150 billion, while being valued between $60 and $65 billion. Yet Ford is more profitable and is growing its revenues faster, while expanding its global market share. Ford furthermore pays out dividends and has created a lot of goodwill with the US public which will benefit the company for years to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.