Is GM Trading Revenue for Profits?

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Jump-starting slow or stagnant sales by offering new car buyers everything under the sun is a tried-and-true method of auto manufacturers the world over. But GeneralMotors (NYS: GM) has pulled out all the stops to get the revenue ball rolling, offering new car buyers between now and Sept. 4 a 60-day, no-questions-asked full refund guarantee. Though not unheard of (in fact, GM did it in 2009), giving customers the option to return their cars and get their money back is an aggressive marketing ploy if ever there was one.

The ups and downs of incentives
Generating revenue in a difficult economic environment is always a challenge. Selling cyclical, big-ticket items when times are tough puts even the best marketing departments to the test. But despite all that, car companies continue to provide shareholders with impressive sales results. And incentives are -- at least in part -- being used to maintain that top-line growth.

In addition to GM's money-back guarantee, customers can also take advantage of the same price cuts GM vendors are offered. And the company is bringing back its no-haggle pricing for a couple of its Chevy cars to get them off showroom floors before new models roll in.


It doesn't take an advanced degree in marketing to see all these incentives should boost sales. The question is the impact these will have on already-thin margins. Driving revenue growth is all well and good, but doing so at the expense of the bottom line is a risky proposition, to say the least.

GM will boost sales, but what about margins?
GM, like most auto manufacturers, has enjoyed a nice increase in sales recently. The 4.76 million cars and trucks sold around the world in 2011 broke long-standing company records. GM followed that up with a record-breaking Q1 with 1.8 million units sold -- that's heady stuff. But here's the rub: First-quarter revenue was only marginally better than Q1 of 2011, and the cost of that revenue jumped more than $1 billion compared to last year.

And all that sales growth? It doesn't stack up to other car companies. The U.S. auto industry as a whole has grown 15% this year, compared to GM's 6.3% for its Chevy line, and only 4.3% in total. Of course, GM's market share was hurt as the Japanese automakers returned to nearly full strength, but increasing sales for GM is still a must, no doubt about it.

When margins are as squeezed as GM's, clearly top-line growth isn't falling to the bottom line. And the margin pressure could become even more troubling when those incentives kick in. The operating margin of 2.59% that GM generated doesn't compare to competitors like Ford's (NYS: F) 5.82% in the same period.

Toyota's (NYS: TM) 4.18% operating margin and Honda's (NYS: HMC) 4.66% are both significantly better than GM's as well. Once these historically well-run companies get a few more quarters behind them, those margins should improve even further, though they are still vulnerable to the strength of the yen.

Going forward
After a decade of stellar sales results in China, GM will feel the sting as Chinese economic growth slows, but the good news is the Russian market is picking up some of the slack.

The first half of 2012 saw a "mere" 136,400 vehicles sold in Russia, certainly nothing close to the 1.4 million sold in China. But that was was a 21% jump over last year, and that's a trend that will continue. As Tim Lee, the head of international operations, put it: "I would put Russia in the same breath as China."

Along with the Middle East, South Korea, and Australia, GM's International Operations unit (everything outside of North America except Europe and South America) accounted for a full 40% of this year's overall sales. Not bad. And the launch of the Chevy Cruze in India will boost global sales further -- just don't expect much with the current economic conditions.GM has done a lot right lately, and it has the sales results to prove it. Management also recognizes the growth in sales hasn't kept pace with others in the industry, and they've jacked up the incentives to help change that. But keep an eye on those margins if you're considering investing in GM, because higher revenue doesn't always amount to increased profits.

Ford looks like it's learned that lesson. Instead of raising incentives as the Japanese automakers return to full strength, the Blue Oval says that it's comfortable with losing some U.S. market share in 2012 in order to maximize profits. That's probably good news for the company, but it's still struggling with growing losses in Europe. That's one of the main reasons that its stock has slipped below $10 a share. But Ford remains a well-performing company that's making excellent vehicles. Does this dip create a tremendous buying opportunity for Ford, or are there other hidden risks you should be aware of? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

The article Is GM Trading Revenue for Profits? originally appeared on Fool.com.

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor, as well as creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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