GM Beats Estimates Despite Problems

Despite a steep drop in profits, General Motors' (NYS: GM) second-quarter earnings beat estimates, as the company's European losses were not as large as analysts had expected.

GM reported on Thursday that it had earned $1.5 billion, or $0.90 a share -- well ahead of the $0.75 consensus estimate. Revenue of $37.6 billion was down about $2 billion from year-ago numbers, a drop GM said was almost entirely due to the strengthening of the U.S. dollar versus the euro and other currencies.

It was GM's 10th consecutive profitable quarter, making this the company's longest winning streak in more than a decade. But as recent turmoil has made clear, not all is well at the General.

So-so results show much remains to be done
GM's performance in Europe were poor, but not nearly so poor as many analysts had expected. In the wake of Ford's (NYS: F) $404 million second-quarter loss in the region, many experts adjusted their estimates of GM's European loss higher, with some aiming as high as $600 million.

But the reality wasn't quite that bad: GM lost a "mere" $361 million in Europe in the second quarter, though that's likely to widen as the year goes on. And the rest? Here's how it shook out:

  • North America -- in particular, the U.S. market -- is GM's "powerful earnings engine," as CEO Dan Akerson put it on Thursday. North America drives the bulk of GM's earnings quarter after quarter, and Q2 2012 was no exception: Pretax earnings were $2 billion, down from $2.2 billion a year ago in part because of the discounts and incentives GM has offered to keep aging products afloat until their replacements arrive.

  • South America essentially broke even with a pretax loss of $19 million -- a small decline from the year-ago quarter. However, Akerson and CFO Dan Ammann both expressed confidence that the division has turned a corner and is on an upswing. Market share in the region is down a little, but GM has launched some long-awaited new products that are beginning to gain traction. The Cruze and Sonic are both selling well, and GM expects continued improvements in coming quarters.

  • Europe lost $361 million, as noted above, and those losses are likely to continue or even worsen for several quarters as GM's European dealers sell down a high level of inventory, rather than ordering new cars. But some progress is finally underway: Akerson installed turnaround specialist Thomas Sedran as the division's interim chief last month, and Sedran has since been joined by a new CFO and a new sales chief, both recruited from Volkswagen (OTC: VLKAY). Negotiations with German labor leaders on cost reductions continue, Akerson said on Thursday, and he expects to "have a comprehensive agreement in place sometime this fall."

  • International operations, GM's catch-all for the rest of the world, earned $557 million before taxes -- roughly flat versus year-ago numbers. Equity income from GM's joint ventures, mainly in China, made up about half of that figure. Revenue and margins were up, in part because of improvements in GM's operation in Korea, Ammann said. Market share for the region as a whole was down a little, almost entirely because of the recoveries of Toyota (NYS: TM) and Honda (NYS: HMC) in their home market of Japan, where GM has little presence.

  • GM Financial earned $217 million before taxes, a big increase over the $144 million earned a year ago. The unit's leasing business has expanded -- as has its subprime lending, though not to unreasonable levels -- and it has begun offering loans and financing plans to GM's dealers.

Forecast: cloudy
GM has taken a lot of heat recently for its inventories of pickup trucks in the U.S., which are very high -- 136 days' worth as of the end of July, versus an industry norm of 60 days or so. GM is in the process of transitioning several factories that make pickups and full-sized SUVs to instead produce all-new models that are expected early next year, and the company says it has stockpiled inventory to meet demand in the interim. Inventories should fall to normal levels by year-end.

Meanwhile, GM's earnings at home in the third quarter are likely to be a bit lower. GM had previously said that it expected the second and third quarters' results in North America to come in roughly in line with its pretax first-quarter earnings of $1.7 billion. Because it shifted some expenses to the third quarter -- allocating more money to advertising around the Olympics, for example -- Ammann now says the average of the second and third quarter will be in the same range as the first. That implies a pretax number in the range of $1.4 billion for North America next quarter -- a significant decline.

And what of Europe? Ammann wasn't willing even to hint at anything resembling guidance, saying that while GM would continue to reduce inventories, match supply to demand, and continue cost-reduction actions, the unpredictable European economy would be a key driver of earnings for the next several quarters.

The upshot: It's healthy, but it's a work in progress
Compared with how it looked for much of the last 25 years or so, GM is in great shape: It has $32.6 billion cash on hand, which is up a bit from last quarter, and only modest debt. The company's pension shortfall remains a concern -- little has changed on that front-- but profit remains solid despite tough market conditions and GM's aging product line.

That last item will improve as the General continues to roll out new products -- particularly its new trucks -- over the next couple of years. That, plus continued work to reduce costs and increase efficiencies, should help the company's bottom line significantly in 2013 and beyond. Still, it's clear that GM still has an awful lot of work to do.

GM's stock is currently hovering near its post-bankruptcy low. But if Akerson can harness GM's potential, it could have significant upside in coming months as new products hit showrooms and improvements continue around the world. However, investors need to stay attuned to fluctuating demand and the ability of automakers like GM and Ford to respond in unison. For starters, one of our top equity analysts has compiled a premium research report with in-depth analysis on Ford's competitive edge. To find out what could propel Ford down the road, get instant access to this premium report now.

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