A Mixed Outlook for GM as It Works to Complete Its Turnaround

General Motors
In its second quarter, General Motors (GM) beat analysts' estimates with a profit of $1.5 billion, as losses in its much-troubled European division were less than many experts had predicted.

That wasn't necessarily good news, though. It's a billion dollars less than GM earned in the second quarter of last year. That's a huge drop, and it reflects the big headwinds now facing the world's largest car company.

Europe's Not Getting Better Anytime Soon

GM's profit was better than expected because its European division, which includes money-losing German subsidiary Opel, reported a loss of $361 million. While that's a big drop from the $102 million that GM made in Europe a year ago, it's much less painful than the more than $500 billion that many analysts expected it to have lost after rival Ford (F) reported a shocking $404 million loss in Europe last week.

But that doesn't mean GM's long-troubled European operation is on the mend -- not yet, anyway. GM's dealers in the region have too many cars and trucks in their inventories. GM's European factories will likely have to reduce production through the rest of 2012 so that dealers can sell off existing stock. That means even lower income for the company in the second half of the year. Meanwhile, GM's costs remain high because it has too many European factories and not enough orders to keep them all busy.

GM is working on the problem. It replaced its Europe chief with a turnaround specialist, and hired two key executives from Volkswagen (VLKAY) to fill important senior-level roles. Meanwhile, GM officials are negotiating with union leaders in Germany, planning to close one or more factories and cut costs in a number of other ways.

CEO Dan Akerson said on Thursday that he expects a deal with the unions to be announced sometime this fall. That will be a welcome development, though any actual savings from the agreement could still be several years off.

Concerns Mount at Home

GM's problems go far beyond Europe, though. While its Asian operation remains healthy and profitable despite a slowdown in China, GM's slipping market share in its most important market -- the United States -- is starting to become a concern.

GM's market share fell to 18.1% in the first half of 2012, down from almost 20% just a year ago. But that's not the only problem. GM is spending more on incentives -- those "cash back" or low-cost financing deals that dealers love to advertise -- to keep its sales numbers going.

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The real problem is that many of GM's products are dated: They're no longer competitive with the best cars and trucks on the market. GM wasn't able to invest in product development during its spiral into bankruptcy, so it lost a lot of ground to rivals like Ford and Toyota (TM).

Because a new car or truck can take three years or longer to develop, GM has had few new products since its bankruptcy -- while Ford, which had borrowed heavily before the economic crisis and was able to keep up its spending, has rolled out a series of hit products like the Explorer and Focus.

GM has a bunch of new vehicles coming, including all-new pickups and SUVs that are due early next year. That should help GM make up some of its lost ground without heavy spending on incentives. But meanwhile, the pressure to improve sales is immense; it may be part of what drove Akerson to fire his marketing chief, Joel Ewanick, earlier this week.

Taxpayers Can Still Break Even

GM's profits in its North America division will likely be lower in the third quarter, it said. That's partly because it shifted some spending to summer from spring -- in part, to buy more ads around the Olympics. That's not a big source of concern, but if profits dip more than expected, GM's stock price will likely suffer further.

Despite the concerns, post-bankruptcy GM is still fundamentally healthy. Its debts are low, it has more than $30 billion in the bank, and it has now booked 10 consecutive quarters of profits. But its low stock price means that the federal government is unlikely to sell its stake anytime soon, and that remains a source of frustration for GM's leaders and for many Americans.

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A Mixed Outlook for GM as It Works to Complete Its Turnaround

Today's Bank of America (BAC) was created through a series of mega-mergers and acquisitions engineered by CEO Ken Lewis, including the purchases of FleetBoston in 2003 and credit card giant MBNA in 2005. By 2007, he had succeeded in making Bank of America the largest bank in the U.S. by deposits. But then Lewis overreached. As the financial system was heading toward near-collapse in 2008, Bank of America bought crippled mortgage bank Countrywide Financial in January and deeply troubled investment bank Merrill Lynch in September.

After that, Bank of America's financial troubles multiplied so rapidly that it was forced to take much more TARP money than most other large U.S. banks: $45 billion.

Lewis was replaced by Brian Moynihan, but Moynihan's tenure has been even worse. JPMorgan Chase & Co. (JPM) passed BofA to become the nation's largest bank. Crippling losses, primarily from Countrywide legacy loans, led it to announce it would cut more than 30,000 jobs. In late 2011, a $50 billion class action suit was filed in over the Merrill Lynch acquisition.

Bank of America was also the target of several mortgage fraud suits, and entered into a settlement which cost it and four other large U.S. banks a combined $25 billion. BofA still faces legal and balance sheet problems, which may force it to raise tens of billions of dollars. And finally, its exposure to the weak U.S. real estate market is unparalleled among banks. The overall result is a too-big-to-fail bank that is only limping along.

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You may be surprised to see Zynga (ZNGA), the premier social gaming company, on our list. Its revenue rose from $19.4 million in 2008 to $1.14 billion last year. But Zynga spent plenty of money to reach the apex of its industry, and last year lost $404 million. Investors were drawn to the company because it had been effectively piggy-backing games onto the Facebook platform, which currently has nearly 1 billion members.

The success of the model appeared astonishing. In its last reported quarter, Zynga says it had 192 million monthly unique users, up 27% from the same quarter a year before. But Zynga lost $23 million last quarter on revenue of $332 million. In the same quarter a year ago, Zynga made $1 million on revenue of $279 million.

Zynga's growth rate is no longer impressive, and the problems it faces apparently will worsen soon. The company recently lowered its outlook to reflect delays in launching new games and a faster decline in the use of existing Web games.

But Zynga's real problems are more complex - and more permanent -- than delays and declining use. The game market is becoming more fragmented by the day, and as the total number of virtual games has grown, the cost for Zynga to maintain its lead has become almost prohibitive.

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Dell (DELL), along with Hewlett-Packard (HPQ), Compaq, and Gateway, was one of the companies that capitalized on the creation of the generic IBM PC platform. But the environment in which it grew rapidly by selling inexpensive PCs has changed radically.

First, Dell's computer sales business was damaged by poor management decisions and the rise of Asian manufacturers, which took significant market share from the company. Now, it's being hammered by the smartphone and tablet PC sectors.

All PC makers -- Asian and American -- face substantial pricing challenges today. And as computing has moved quickly to mobile devices, demand for computers has fallen. Dell didn't adapt, didn't diversify the way IBM did, and its reliance on PC sales has left it heading toward irrelevance.

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The New York Times' key failure was that it didn't move online fast enough to compensate for the rapid erosion of print advertising -- tardiness that allowed it to be challenged on the Web by properties like The Huffington Post, Google News, MSN, AOL and Yahoo.

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The New York Times' uniqueness among American newspapers is the quality of its editorial content, and it has for the most part retained its large editorial staff. (It did lay off 100 people in 2009, which was about 8% of the newsroom). But The Times has not been able to show significant top-line growth, even with its intensive digital subscription efforts. Quite simply, print is in too much of a shambles for the company to shore itself up in the digital world.

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Sprint's $35 billion Nextel purchase in 2004 can be seen in retrospect as a key blunder. Their networks ran on different platforms, and integration issues drove customers away from the combined company. Sprint made the MSN "Customer Service Hall of Shame" several times, most recently in 2010. Its customer service has improved significantly since then, but the damage had been done.

Sprint's revenue has fallen from $41.1 billion in 2007 to $33.7 billion last year. It now has about 50 million subscribers to Verizon's 104 million and AT&T's 95 million. As a Morningstar researcher recently noted, "While Sprint has struggled, Verizon Wireless and AT&T have benefited at its expense. Fending off these much larger rivals will be increasingly difficult as data services become more important to the industry."

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Young Groupon (GRPN) seems an unlikely candidate for a list of companies that have their best years behind them. But its stock price has fallen by more than 70% since its November 2011 IPO. Groupon's primary problem is that the online coupon business it pioneered is a commodity business now. Amazon and other large retailers have had little trouble entering the sector.

Groupon soared upward: In 2009, it posted revenues of only $15 million, but by 2011 revenues were over $1.6 billion. But Groupon paid dearly for that growth. The company lost $675 million over that same two-year period before interest and taxes. Groupon's revenue keeps growing, but its bottom line losses are growing too: In the most recent quarter it lost $147 million, far worse than its loss of $12 million a year earlier.

Groupon's new competitors have replicated most of its tactics rapidly. Chief rival LivingSocial had 7.2 million unique visitors last year to Groupon's 11 million, according to online industry research firm Comscore. Google has entered the sector with a product called Google Offers. And those are just the big names: Industry website VentureBeat lists 33 direct competitors to Groupon.

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But the purchase did almost nothing to help AMD's fortunes; its main result was that it saddled AMD with unsustainable debt. In 2007, AMD had revenue of $6 billion, while Intel's was $38.3 billion. Last year, AMD's revenue had risen to $6.6 billion, while Intel's had soared to $54 billion.

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GM's stock price is likely to rise quite a bit in time, as the company reduces costs in Europe, gets its new products to market, and continues to improve its operations around the world. Akerson and his team are mostly doing the right things, even if they're hard to see right now. With luck, GM's stock will rise enough that taxpayers can break even, or even profit -- and bring GM's unfortunate "Government Motors" chapter to a close.

At the time of publication, Motley Fool contributor John Rosevear owned shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford.

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