Automakers' Earnings Offer A Little More Treat Than Trick

Includes: F, GM
by: David Silver

Ford (NYSE:F) and General Motors (NYSE:GM) both reported earnings last week that surpassed the Street's expectations. Both reports highlighted the strength in North America as well as just how weak Europe is these days. Ford lost $468 million over the past three months, while General Motors lost $500 million. Losses are expected to continue to mount in Europe for both companies, but it appears as if Ford is acting a little quicker to fix the situation. Ford is taking a book out of its own playbook to help fix Europe. Ford was able to avoid going bankrupt or accepting government aid by shuttering plants and slashing productions across North America during the worst of the Great Recession, and it was able to avoid taking government aid. It appears as if CEO Alan Mulally is taking his restructuring of Europe to the next level. Mulally indicated that three plants will be closed, slashing 13% of its workforce and 18% of new car production capacity in the region.

Ford charged more for its vehicles and spent less on developing them, pushing its North American profit margin to 12%, the highest in its history and well above U.S. rivals. Its North American business largely carried the day for the company, delivering a $2.3 billion pretax profit. GM lost approximately $500 million compared to a loss of $300 million in the third quarter of fiscal year 2011. Much of the loss was attributed to the automaker's Adam Opel division in Germany, which is undergoing a restructuring under the eye of Vice Chairman Stephen Girsky. I am not such a big fan of the move to take a 7% stake in Peugeot (please see the article I wrote in February for more). It feels vaguely like doubling down on a losing hand, especially considering Peugeot received a lifeline last week for 18 billion euros, 11 billion euros from investors, and 7 billion euros that was guaranteed by the French government. The positive sign is that GM's management sees an end to the morass that is Europe; management indicated it expects Europe to be a cash black hole until "mid-decade."






$32.1 billion

$32.3 billion

$31.1 billion

Earnings Per Share




General Motors





$37.6 billion

$38.0 billion

$36.7 billion

Earnings Per Share




In all, it was a good quarter for North American automakers, but looking forward can we expect the same? Latin America was strong for both companies, but it's the strength (or lack thereof) in Europe that is the key driver of the stocks right now. Both companies expect to lose more than $1.5 billion during 2012 in Europe and don't expect a big improvement moving forward. GM expects Europe to eventually bounce back

After dealing with the aftermath of Superstorm Sandy (I was without power for Tuesday and Wednesday) I was actually excited about the lack of election rhetoric, but General Motors is moving into "Romney Stock" territory as the governor has indicated he would liquidate the government's ownership of GM, which will pressure the stock price. I want the government to be out of the car business, but taking this big of a loss ($52 is the breakeven point) doesn't make sense for GM or for the government.

It was a strong quarter for both companies, but I am still in Ford's corner. Mulally indicated he would be stay on as CEO until at least 2014, which takes a level of uncertainty out of who will lead the company. Additionally, Ford North America President Mark Fields was promoted to the chief operating officer position, essentially being groomed for the top spot. I like that Mulally is sticking around, and I really like that Fields will have hands-on training for more than a year before he is given the reigns to the Dearborn, Mich., company.

General Motors is getting better; there is no way around it. I am no longer avidly saying to avoid the stock. I do think that three years down the road, General Motors will be free of government ownership and will be a stronger company, but management has not done enough to fix Europe. Supply still greatly outpaces demand, and GM has not made any big production cutback announcements yet. Three years down the road, the U.S. economy will be better, and hopefully the rut that Europe is stuck in will be behind us. Because of those two reasons, I feel that GM will be in a better position three years down the road. That said, there will be plenty of time to accumulate a position in GM, so I wouldn't be rushing to jump on board just yet.

Disclosure: I am long F. 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.

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Tagged: , Auto Manufacturers - Major, Earnings
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