General Motors - Opel And Pension Obligations Continue To Drag Shares Down

| About: General Motors (GM)

Shares of car manufacturer General Motors (GM) ended the week 2% higher after the company reported its second quarter earnings on Thursday.

Second Quarter Results

General Motors reported second quarter income of $1.5 billion, or $0.90 per diluted share. Last year the company reported earnings of $1.54 per share. Net profits fell 41% in the second quarter as a result of GM's loss-making operations in Europe. Revenues decreased from last year's $39.4 billion to $37.6 billion, almost entirely due to the impact from a strengthening in the US dollar.

CEO and Chairman Dan Akerson commented, "our results in North America, our International Operations and at GM Financial were solid but we clearly have more work to do to offset the headwinds we face, especially in regions like Europe and South America."

Segmental Information

The North America division reported a 1% decline in revenues to $22.9 billion. Operating income came in at $1.96 billion, a decline from last year's $2.25 billion. The results improved from the first quarter of 2012, when the division reported operating income of $1.69 billion.

The European activities reported $5.89 billion in second quarter revenues, a 21% decline compared to last year. The company reported an operating loss of $361 million, compared to a profit of $102 million in the second quarter of last year. In the first quarter of 2012 the division lost "only" $256 million on revenues of $5.51 billion.

International activities reported $6.94 billion in revenues, up 8% compared to last year. Operating income came in at $557 million, down slightly from last year's $573 million. Earnings rose about 5% compared to first quarter earnings of $529 million.

South American revenues fell 4% to $4.18 billion. The activities reported a $19 million operating loss, compared to a profit of $57 million last year. Results are disappointing as the division reported operating profits of $83 million in the first quarter of this year, on revenues of $3.94 billion.


General Motors ended its second quarter with roughly $34.3 billion in cash, equivalents and marketable securities. The company operates with roughly $14.7 billion in short and long term debt. The company furthermore has massive pension fund liabilities and retirement benefits outstanding.

For the first six months of 2012 the company reported $75.4 billion in total revenues, on which it reported net income of $3.25 billion, or $1.49 per diluted share. Based on Friday's closing price of $20.04 the company is valued at merely $31 billion. This values GM at roughly 0.2 times annual revenues and 7 times earnings, based on a $3.00 full year EPS target on revenues of around $150 billion.

This valuation compares to a revenue multiple of 0.3 times for Ford (F), 0.4 times for Daimler AG (OTCPK:DDAIF) and 0.6 times for Toyota Motor (TM).

Currently, General Motors does not pay a dividend.

Investment Thesis

Shares of General Motors trade unchanged so far in 2012 around the $20 mark. Shares traded around the $27 mark in February, but lost ground amidst the renewed European Debt turmoil. Shares have lost almost 40% after going public at $33 per share in the end of 2010. There are two main reasons behind the underperformance of General Motor's shares over the past two years.

First of all, there are the European operations which continue to lose money. The European division posted a quarterly loss of $361 million, driven by the struggling Opel brand. Three years ago, General Motors almost sold Opel, but the board decided to keep the brand as it plays an important role in the global product program. Lately GM already hired new top executives for the brand, but analysts and investors grow impatient with lack of real restructuring efforts at the division. CEO Akerson, in the meantime, is growing impatiently as well as the unit lost a cumulative $14 billion over the past 12 years.

Second, there are the pension obligations of General Motors. In June, the car manufacturer offered lump-sum payments to thousands of white-collar retirees, to reduce its pension obligations. Currently the company has about $134 billion in pension obligations and the proposed lump-sum payments of $26 billion will shift these obligations to insurer Prudential. General Motors hopes to finalize the transaction by year's end, and cut its pension obligations by roughly a fifth. The real problem is not the size of the obligations, but the fact that GM's pension fund is underfunded by roughly $25.4 billion, according to the company. The proposed deal will however cut both total obligations of the fund and the degree to which it is underfunded, resulting in better earnings visibility for analysts and investors.

Many investors and analysts thought that the revised General Motors could have a fresh start, when going public again by the end of 2010. With shares having fallen almost 40% from that point in time, it becomes apparent that General Motors is still suffering. Shares look cheap on sales and price-earnings metrics, however the continued losses in Europe and the massive pension liabilities are holding down the company's shares.

While the US operations are performing up to their standards, don't buy into the "value" trap until the company seriously addresses its European losses and pension obligations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Tagged: , Auto Manufacturers - Major, Earnings
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