Why General Motors Is No Closer to Escaping the European Mess
By: Chad Fraser
When I wrote about General Motors (NYSE: GM) back in November, we noted that the company’s struggling European operations continued to hold it back, causing many to question whether GM had really turned the corner since declaring bankruptcy in 2009.
This problem has been an ongoing frustration for General Motors investors: the company’s European business faced difficulties before GM faced the double whammy of bankruptcy and the European sovereign debt crisis. Today, not much has changed for General Motors on the continent.
The company highlighted the size of the challenge it faces in Europe when it reported earnings last Thursday. In the first quarter of 2012, General Motors reported, its European business had swung to a loss of $256 million after eking out a $5-million profit a year ago. Revenue at the division dropped 20%.
“We still have a long way to go,” said General Motors CFO Dan Ammann.
North America Is Carrying the Load for General Motors
Even with its headaches in Europe, the company’s overall results were better than expected.
In the first quarter of 2012, General Motors earned $1.0 billion, or $0.60 a share. That’s down sharply from $3.2 billion, or $1.77 a share, a year earlier.
However, if you exclude one-time items (mainly charges related to restructuring the European business), the company would have earned $1.6 billion, or $0.93 a share, in the first quarter of 2012, a much smaller decline from $1.7 billion, or $0.95 a share, a year earlier. Revenue rose by $1.6 billion, to $37.8 billion. Both figures beat Wall Street’s expectations of $0.85 a share in earnings on $36.4 billion of revenue.
The company’s main strength was at its North American division, where profits rose to $1.7 billion from $1.3 billion. Its financing business also posted strong gains, with profits up 39%, to $181 million.
General Motors May Be Starting to Catch up to Ford
Zacks.com, as it often does when General Motors reports earnings, compared the company’s latest performance to that of Ford. The site’s analysis suggested that the gap may be closing between the two: “[Excluding unusual items] GM’s major rival Ford Motor Co. posted a sharp 20% fall in profits to $1.6 billion in the first quarter of the year from $2.0 billion in the same quarter of 2011.”
These declines were much steeper than the ones that GM reported. Still, Zacks did point out that Ford also beat analysts’ estimates, despite the drop. The site maintained its #3 ranking (Hold) on GM. Ford also carries a Zacks #3 ranking.
But even though both automakers are making progress in North America thanks to pent-up car demand, their competitors are looking to take advantage of that growth, as well, mainly through aggressive discounts and other incentives.
“Unfortunately for GM and Ford,” Edward Jones analyst Matt Collins told Reuters, “the competition is as tough as ever. Everybody wants a bigger piece of the U.S. market, so they’ll have to fight for every sale.”
Another thing investors will need to watch out for is softening US economic data.
And Toyota Isn’t Far Behind
One GM competitor to watch is Toyota (NYSE: TM). The company, now recovered from the recalls and natural disasters that have plagued it in the past few years, has been rolling out new models of its popular fuel-efficient cars, like the Corolla and Prius Hybrid.
Moreover, Toyota, which lost its crown as the world’s biggest automaker by sales to GM in 2011, is expected to report its best earnings in five years on Wednesday.
Value investors should look for the Japanese auto giant to also forecast profits in the fiscal year ending March 13 that will top General Motors’ expected earnings over the coming four quarters. This would mark yet another first for Toyota.
Article originally posted here.