GM Earnings Review: Car Recall Related Expenses Hurt But Outlook Still Optimistic For GM

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General Motors

General Motors (NYSE:GM) released its first quarter results, which suffered as expected due to expenses related to car recalls and unfavorable currency translation.  Revenue for the quarter was higher because of an increase in the number of units sold and slightly higher average pricing. GM delivered 2.4 million car units this quarter, up 2% year-on-year comparison. Car sales were up in Europe and China –  infact, the company achieved record sales in the region – but sales decreased in North and South America. As a result, the company’s global market share declined by two-tenths of a percentage point to 11.1%. Net income for the quarter stood at $100 million despite incurring expenses of $1.7 billion related to product recalls and losses to exchange rate fluctuations of the company’s Venezuelan subsidiary.  [1]

We have a $40 price estimate for General Motors, which is about 15% more than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.

North American Still Strong But Sales Might Suffer In Upcoming Quarters

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GM North America’s (GMNA) revenues came in $1.4 billion higher at $24.4 billion compared to the first quarter of fiscal 2013. This increase of over 6% was driven primarily by record average unit prices of a car in the region. The company’s market share in the continent stood at 16.5%, with a share of 70% in the U.S. Even though volumes sold suffered due to the limited availability of GM’s full size SUVs, a favorable pricing mix of $1.7 billion driven by the launch of full-size trucks Cadillac CTS and Chevrolet Impala pushed the company into profitability over the quarter. [2]

However, sales in the future are expected to suffer the impact of the ignition switch related car recalls. The company had to recall as many as 7 million cars in North America after it was found that a faulty ignition switch had led to as many as 13 fatalities. The company had known about the fault as far back as 2001. [3] As a result, the company has been the butt of much negative publicity, which is expected to put a brake on the company’s momentum in the region. However, sales have not been impacted so far. With another 15 models to be refreshed or introduced this year, margins as well as unit sales should continue to remain strong. 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. [4]

European Losses Shrink

GM’s European operations were unprofitable as expected due to restructuring related expenses. However, the company’s subisidiary Opel Vauxhall showed continued strength in the region, with revenues increasing 9%. Opel Vauxhall gained its share in 10 European markets including Germany. [2] The automaker’s overall market position in Europe is improving and this effect can be directly attributed to Opel Mokka and Insignia, the company’s new flagship brand. Looking ahead, the company should be encouraged by rising demand, improving consumer confidence and a weakening sovereign debt crises in Spain, Greece and Portugal. Car sales in Europe have been rising for seven straight months, spurred on by high sales in the U.K.. This should keep the company on track to break even in the region by next year. [5]

Record Sales in China

GM’s sales in China set a new record this quarter, achieving the 1 million figure in early April. The automaker also gained 0.1% of market share in China, owing to the growth of Cadillac, Buick and Wuling brands. [2] The company expects the sales growth rate of  Chevrolet to improve as well, as it gets set to introduce a Trax crossover in the region this quarter. This is an important product for the company because Crossover and SUV demand in China is expected to grow at about a 10% annual rate and reach about 7 million units by 2020. [6] GM’s equity income improved by 9% for the quarter.

GM is now looking at the luxury car segment in China, since it already has a significant presence in the mainstream car segment. Last year, GM got the government’s approval to build a $1.3 billion plant with a capacity to produce 150,000 units of Cadillac cars locally. With more competitive pricing, GM is targeting a 10% market share in the Chinese luxury market by the end of the decade. As the proportion of the higher priced vehicles increases, average income earned per vehicle could rise even further.

Sales in the rest of the world markets were disappointing.  A number of automakers are uncertain about their near-term performances in developing economies due to high volatility that these markets have exhibited lately, fueled to a large extent by the Fed’s monetary policies. Recently, Ford also laid out a cautious guidance, citing currency fluctuations in South America which is likely to erode earnings in 2014.

Earlier this year, GM 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. In 2014, the net income will also be impacted by the ongoing restructuring expenses, which could swell to $1.1 billion. [7]

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Notes:
  1. GM 8-K []
  2. General Motors’ CEO Discusses Q1 2014 Results, Seeking Alpha, April 2014 [] [] []
  3. GM Now Says It Detected Ignition Switch Problem In 2001, Wall Street Journal, March 2014 []
  4. GM 10-k []
  5. European Car Sales Rise a Seventh Month on UK, Bloomberg, April 2014 []
  6. China And Other Emerging Markets To Drive SUV Demand, China Economic Review, February 2014 []
  7. GM Slips After Forecasting ’Modest’ Profit Gain in 2014, January 16, 2014, bloomberg.com []