GM's Profits Disappoint Investors - but Its New Trucks Shine
GM has made big improvements to its pickup trucks and big SUVs, and cheap gas prices have helped push sales of both upward this year. That resulted in great profits for GM in its home market, but challenges in other parts of the world put some potholes in GM's road to fatter profits.
Boss Wants the Company to Make More Money
CEO Mary Barra thinks that the old Detroit automaker should be earning a lot more money. GM sells almost as many cars and trucks around the world as Germany's Volkswagen (VLKAY) and Japan's Toyota (TM), but it makes considerably less money.
Part of the problem is that for years GM didn't use its size to best advantage. Rather then selling a single lineup of cars and trucks around the world, like Toyota does, GM's regional units developed their own models, almost independently.
That added a lot to GM's costs, without adding much to its sales or profits. GM resorted to developing its products on the cheap, to try to save money -- but that resulted in cheap-feeling cars and trucks that would only sell with big profit-robbing discounts. Anyone who owned a GM car in the 1990s had a firsthand look at the problem.
GM does things differently now. Like Ford (F), which has used its "One Ford" approach to cut costs and increase quality, GM is reducing the number of different products it offers around the world, while spending more money to make its remaining products better.
Better Cars and Trucks Are Already Boosting GM's Profits
That's starting to pay off -- and if you've visited a GM dealer recently, you've seen the results. GM's quality ratings have risen sharply recently, to the point where they're close to those of longtime leader Toyota. And at least here in the U.S., profits are up: GM's pretax profit margins in its home region have now risen for seven straight quarters.
That's because GM's cars and trucks are a lot better than they used to be. GM's dealers can sell them at strong prices, without the huge discounts of old. GM has also received a boost from lower gas prices, which have led more buyers to consider pickup trucks and big SUVs. GM's were all-new recently, and they're strong entries -- and very profitable for GM. Sales of the Chevy Silverado were up almost 18% in the first quarter, and some of its new SUVs posted even bigger gains.
One downside to that success is that GM's share of the U.S. market for cars has fallen over the last year. Two of its best-sellers, the Chevrolet Malibu and Cruze, are reaching the ends of their lives. Car-shoppers who might have once given them a look are leaning toward newer entries now.
But that might change soon. An all-new Malibu will start arriving at dealers later this year; it's a big improvement over the current car. A new Cruze is expected next year.
Now, GM Is Focusing on Its Problems Overseas
Now, the challenge for Barra and her team is to sustain GM's momentum in the U.S. while bringing the same approach to GM's other operations around the world.
The changes may be most visible in Europe. For years, GM's Opel brand was almost a separate carmaker, running its own operations -- and losing billions of dollars. Now, Opel has strong new leadership, and it's tightly integrated into GM's global operations.
Opel's latest products are still distinctively Opels -- imagine Buicks infused with some German sportiness. In fact, the new Opels are closely related to the Buicks that GM sells in the U.S. and China (the impressive Buick Regal is also Opel's impressive Insignia sedan).
The mashup has improved quality and profits for both brands. Buick isn't a big player in the U.S. these days -- although it's gaining some ground -- but it has become a very popular brand in China. GM's sales in China have been strong, but its profits trail those of VW. Barra is working to change that by bringing more high-profit SUVs and Cadillacs to China, with good results so far.
GM's profits from China took a little dive in the first quarter because of the costs of launching some of those new products, including a sharp new crossover SUV for Buick called the Envision that could come to the U.S. next year. And GM faced some challenges in South America, where a slowdown in new-car sales led to a loss.
GM Is Still on Track to a Much Brighter Future
GM's first-quarter profits disappointed investors who hadn't foreseen the potholes GM hit overseas. That sent GM stock down sharply.
But the longer-term picture is still quite good for GM. Under Barra's sharp leadership, GM is continuing the job of fixing all of the problems that dogged it for decades, one by one. Already, its cars and trucks are a lot better, and its customers are a lot happier. As GM's ongoing revival continues to pick up steam, its sales and profits -- and its stock price -- should continue to rise.
Motley Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's free report on one great stock to buy for 2015 and beyond.