GM Earnings Preview: Car Recall Related Expenses To Hurt GM
General Motors (NYSE:GM) is scheduled to announce its Q1 FY14 earnings on April 24. 2013 was a really strong year for the company with robust sales in the U.S. and China, combined with an improvement in its European operations. During 2013, GM’s unit sales rose 4% in 2013 to 9.7 million vehicles, including 2.8 million units in the U.S. and 3.2 million in China. Recently, the automaker also announced that it expects modest profit gains in 2014 from the refreshed line-up, which includes 15 new models in the U.S. and 17 in China. [1]
We have a $40 price estimate for General Motors, which is about 18% more than the current market price.
North American Operations Steady
North America accounts for about 35% of the company’s unit sales. In 2013, GM sold 3.2 million vehicles in the region, 7% more than the 2012 figure. Furthermore, a slew of model refreshments under the Chevrolet and Cadillac brands have pushed up the average pricing and helped GM realize higher margins. Through the four quarters of 2013, the North American operating margins rose 60 basis points to 7.8%, spurred by the Chevrolet, Buick, Cadillac and GMC, with all increasing their retail market shares in North America. [2]
During the first quarter of 2014, the cost of recalling 6.3 million vehicles worldwide, including 2.6 million cars in North America due to a faulty ignition switch, should put a dent in the company’s profits. The company is expected to record significantly lower earnings due to its decision to record recall related expenses in its books in this quarter. The company has stated that it expects to incur costs approximately $1.3 billion in the first quarter, up from $750 million previously, mostly due to the cost of recall-related repairs and providing free loans to customers. [3] Additionally, the company will also record the previously announced $400 million charges related to the devaluation of Venezuela’s currency and the shutdown of two factories there.
European Operations Could Improve
Europe has been a worry not only for GM but for a number of other automakers as well. Most automakers have been relying on sales in China and North America to offset sluggishness in Europe. However, car sales in western Europe have recovered from its six year slump. In the first quarter of 2014, car sales rose 7.2% to 3.1 million from 2.9 million in the same period of 2013. A particular item of good news for GM was the spike in sales of GM Europe’s Opel-Vauxhall subsidiary, which recorded a sales growth of 4.2% despite dumping its Chevrolet brand. [4]
The European automotive market was in a free fall till 2012. The market was in red till the first half of 2013, but things improved in the second half of the year. Now with the market rising, there is once again a renewed optimism about Europe. GM plans to release 23 new or refreshed models by 2016 and hopes to become profitable in the region by the mid-decade.
Chinese Sales Remain Strong
China is GM’s largest automaker and accounts for about 35% of the company’s unit sales. In 2013, GM’s unit sales in the country rose 11% to 3.2 million units. In addition to the mainstream car and van segment, in which GM has a significant presence, the automaker is also looking to bolster its presence in the luxury car market. Earlier in 2013, GM got the government’s approval to build a $1.3 billion plant with a capacity to churn out 150,000 units of Cadillac cars locally. Until now, GM used to sell imported Cadillacs in China, as a result of which, the prices of its models inflated due to the high tariffs imposed on imported vehicles.
With the help of lower prices, GM is targeting a 10% market share in the Chinese luxury market by the end of the decade. That could translate to more than 250,000 units annually just from the sale of luxury cars. If the proportion of higher priced vehicles rises, we could see a healthy increase in the average equity income earned per vehicle. Volkswagen overtook GM as the largest automaker in China in 2013, but GM is working to regain its position as the market leader in the country. The automaker has plans of building five more plants in 2014, in an effort to increase its manufacturing capacity by 65% by 2020. GM expects its China sales to grow by 8-10% this year, in line with the overall growth of the Chinese market. [5]
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- GM Said to Seek Deals in China to Reach 5 Million Goal, February 6, 2013, bloomberg.com [↩]
- GM 10-Q [↩]
- GM Recall Costs Soar to $1.3 Billion, Forbes, April 2013 [↩]
- Europe Car Sales Boom, Forbes, April 2014 [↩]
- GM To Battle Volkswagen In China with $12 Billion Investment, Reuters, April 2014 [↩]