Earnings Review: GM Had A Tough Q1

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General Motors (NYSE:GM) announced its results for the first quarter of fiscal year 2015 on April 23. The company reported earnings of $0.86 per share, a big improvement over last year’s $0.36. [1], and revenue and EBITDA of $35.7 billion and $2.1 billion, respectively. Rising sales of full-size pickups and SUVs drove margins in North America, while higher unit sales drove revenues in China. Europe and South America continued to disappoint due to  weakness in both markets. Also, as promised, the company began its program of returning cash to shareholders through increased dividends and a stock buyback program. We take a look at the figures in more detail in our note below.

We have a $40 price estimate for General Motors, which is about 10% more than the current market price.

GM Holds Firm On Its Strong North America Base

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GM has been working on improving the profitability of its North America operations. In the first quarter, those efforts showed results as the company made $2.18 billion in North America due to rising sales of full-size pickups and SUVs. [2] This quarter marked a seventh consecutive quarter of year-over-year growth in operating margin in this region, with the company reporting a margin of 8.8% for the quarter. [3] However, unit sales were down overall as certain models are nearing the end of their run. The introduction of the new version of the Chevrolet Malibu later this year should help reverse that trend. In the coming period, the auto maker is looking to launch the Chevrolet Spark and the Cadillac CT6 in addition to the Malibu. These new vehicle launches should lead to higher unit sales in the coming two years. [4]

Europe Still Weak

GM is trying to restructure its operations in Europe and hoping to return to profitability next year. In the quarter, the company’s losses in the region narrowed to $239 million compared to $284 million in the same quarter last year. [4] Overall, unit sales fell primarily due to the rapid decline in vehicle sales in Russia, where the auto maker is winding down much of its business, slightly mitigated by rising sales in Western Europe. The company recorded a one-time charge of $428 million due to the closure of operations in Russia. [4] However, it is also easy to see signs of improvement in European operations as the company reported sales growth of 3.1% for the quarter, which outpaced the industry-wide growth rate of 2.8% and resulted in an improved market share in 11 European markets. [4]

China Changeover Leads To Declining Income

GM’s China unit earned $371 million for the quarter compared to last year’s $252 million and its share in the world’s biggest auto market stood at 15.1%. [4] However, GM’s equity income from the unit fell due to an increase in costs related to product change over and product launches. The auto maker is due to launch the Buick Excelle, the Buick Envision and the Chevrolet Sail 3 in the region. The Buick Excelle will be manufactured at GM’s recently opened 240,000 plant in Wuling as well. [4]

Having achieved higher market shares in the region over the last few years, the company’s focus has now shifted towards higher profits. To this end, the company is trying to grow the sales of crossovers, SUVs, and Cadillacs in the region. Last year, global Cadillac sales increased 5% on a 47% increase in China, bringing the cumulative sales growth of the brand to 35% since 2012. [5] Chevrolet also achieved a record sales figure as volumes of the new Trax crossover gathered steam. [5] 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 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% share in the Chinese luxury market by the end of the decade. As the proportion of higher-priced vehicles increases, average income earned per vehicle could rise even further.

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Notes:
  1. GM 10-Q, SEC []
  2. Ref: 1 []
  3. General Motors’ (GM) CEO Mary Barra on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 2015 []
  4. Ref: 2 [] [] [] [] [] []
  5. Ref:2 [] []
  6. China And Other Emerging Markets To Drive SUV Demand, China Economic Review, February 2014 []