Strong Truck Sales Help General Motors Beat Expectations

Inside The 2014 North American International Auto Show (NAIAS)
Andrew Harrer/Bloomberg via Getty ImagesThe imposing Cadillac Escalade was much-improved last spring, just in time for a big surge in SUV sales. Sales of the Escalade and GM's other big SUVs have boomed, boosting GM's profits.

General Motors (GM) on Wednesday released fourth-quarter earnings that beat Wall Street expectations, as strong sales of trucks and SUVs drove a good profit in North America. GM's net profit of $1.1 billion, or $1.19 a share on an adjusted pre-tax basis, was a big increase over the 67 cents it earned in the fourth quarter of last year. Wall Street analysts surveyed by Bloomberg had expected a profit of 83 cents, on average. GM's stock rose more than 5 percent on the news.

Surge in Truck and SUV Sales Drove a Big Profit in North America

Most analysts think that lower gas prices won't have much of an impact on the types of vehicles American consumers choose, but they certainly aren't hurting sales of trucks and SUVs right now. Sales of GM's Chevrolet Silverado pickup rose 10 percent last year, as the company took advantage of production disruptions that led to short supplies of Ford's (F) rival F-Series.

Sales of GM's biggest SUVs also soared in 2015. The models, which include the Chevrolet Tahoe and Suburban, GMC Yukon and Cadillac Escalade, were improved last spring. These are among GM's most profitable products, anywhere in the world -- and strong sales drove a good result for GM's North America unit, which earned $2.2 billion before taxes in the fourth quarter.

On a full-year basis, those good truck and SUV sales also helped offset GM's costly and embarrassing recall scandal. Full-year profits for North America were $6.6 billion in 2014, down from $7.5 billion in 2013 -- but the damage could have been far worse.

Good Results in China and South America, Progress in Europe

Overseas, the news was mixed -- but GM did show improvements in its International Operations unit, which includes its huge China operation, and in South America. In China, GM earned $516 million in equity income from its joint ventures with local Chinese automakers -- despite ongoing investments in the country, where it has several new factories under construction.

South America has been a tough area for automakers recently, with inflation in Brazil and Argentina depressing new-car sales, and a difficult political situation in Venezuela making it nearly impossible for most automakers to do business there. But GM has held the line on pricing in an effort to offset inflationary pressures, and it worked: Its South America unit made $89 million in the fourth quarter, in contrast to the $187 million loss posted by Ford's South American division.

Europe continues to be a trouble spot for GM, which has lost billions in the region in recent years. An extremely difficult economic situation in Russia isn't helping, but GM Chief Financial Officer Chuck Stevens said on Wednesday that if Russia were excluded, GM Europe would have improved on last year's results.

That's not how it played out, though: GM Europe lost $393 million in the fourth quarter, a bit worse than its $365 million loss a year ago. Despite the losses, GM is making good progress in the region, where it has restructured its operations and launched some well-regarded new models. It confirmed on Wednesday that it is on track to turn a profit in Europe in 2016.

An Increase in GM's Debt, but It Still Has Plenty of Cash

GM took a one-time charge of about $800 million in the fourth quarter, a result of its decision to buy back some preferred stock from a United Auto Workers health care trust. The dividend payments on that stock were costing GM almost $350 million a year; it's a good investment for shareholders.

GM funded that buyback by selling some bonds, taking advantage of low interest rates and its improved credit rating. The result was an increase in GM's debt, to $9.4 billion as of the end of 2014.

That's a manageable amount, given that GM still had $25.2 billion in cash and another $12 billion in available credit lines. That cash hoard is a reserve intended to help GM continue new-product development through a sharp economic downturn. But it might be more than GM really needs: CEO Mary Barra said on Wednesday that GM planned to raise its dividend by 20 percent in 2015.

The Upshot: Despite the Recalls, GM Is Making Big Improvements

The recalls were a costly distraction for GM in 2014 -- but the story here is that despite the distraction, its underlying business remained on track. GM is earning good profits in North America thanks to strong new products and its conservative approach to discounting, its China operation continues to generate strong results, and it's making progress in exporting those successes to its other regional operations.

Motley Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.