General Motors (NYSE:GM) delivered better-than-expected first quarter earnings. While the company’s revenue increased by 4.5% to $37.8 billion, its earnings adjusted for special items fell marginally from $1.7 billion to $1.6 billion. The trend in GM’s earnings has however raised bigger questions. The company’s market share has declined in almost all regions, except China, and Europe which was its Achilles’ heel during the euro-zone crisis has posted losses again.
The Chevy Volt continued to do poorly while the international operations, on a whole, showed a major decline in earnings. These issues have played spoilsport in an otherwise good quarter and suggest a need for further proof that the company is on path of sustained profitability. General Motors competes globally with automakers like BMW (GR:BMW), Ford (NYSE:F), Daimler (ETR:DAI), Audi (NSU:GR), Honda (NYSE:HMC), Toyota (NYSE:TM) and others.
We currently have a Trefis price estimate of $26 for General Motors’s stock, which is more than 20% above the current market price.
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Increase in North America pricing power
The North American market share continued to slip and reached 16.7%, a drop of 1.6% from the corresponding quarter previous year. The company’s sales and vehicle production went up by 9.6% as the competitors gained market share and some of its own products, such as Chevy Volt, did not take off as expected. GM saw its EBIT margin expand on account of increased volume and a pricing hike. This augurs well for the company which has indicated that it wouldn’t mind an increase in pricing power in exchange for market share as this will improve the resale value of its cars. GM’s revenue adjusted EBITDA in North America went up by 1.3 percentage points to 7%.
Backed by the strong revival of the U.S. economy in general and the automotive sector in particular, General Motors has raised its outlook for light vehicles sales in North America by 0.5 million. It has embarked on cost-cutting measures and expects this, coupled with the launch of new models, to drive revenue and profits.
Europe is the sore spot
General Motors’ performance in Europe fell considerably as the worsening euro-zone crisis led to the softening of auto demand in the region. The automaker saw a decline in both sales and market share. Its market share fell by 0.2% to 8.2% while its sales declined by almost 20%. It registered a loss of $256 million this quarter as against a profit of $5 million last year mainly on account of a decline in volumes. The weakening demand also resulted in over capacity, forcing the company to initiate talks with its worker unions in an attempt to match production with demand.
The company’s Europe operation had achieved break even last year but has now again slipped in the red. GM is looking at various measures to boost its profitability. It is negotiating a number of cost-cutting strategies but has stated that it will not be closing down factories or laying off workers. General Motor’s European subsidiary Opel has been barred from closing plants or cutting staff until 2014 under the agreements with its unions.
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