GM Profit Tops Estimates While End to Europe Losses Seen
General Motors Co. (GM), the largest U.S. automaker, reported a third-quarter profit that surpassed analysts’ estimates by more than 50 percent and said it wants to break even in Europe by mid-decade.
Net income slipped to $1.83 billion from $2.1 billion a year earlier, Detroit-based GM said today in a statement. Excluding one-time items, the profit was 93 cents a share, beating the 60-cent average estimate of 17 analysts surveyed by Bloomberg. GM had a strong performance globally “with the exception of Europe,” said Chief Financial Officer Dan Ammann.
The automaker, which has now lost $17.3 billion in Europe since 1999, said it will have a deficit of $1.5 billion to $1.8 billion this year in the region. GM said it expects “slightly better” results in 2013. GM posted a $1.82 billion profit before earnings and taxes in North America.
“This should be the global example of what restructurings look like: Cut 30 percent and bring your union contracts in line with today’s realities,” Peter Nesvold, an analyst with Jefferies & Co., said in a telephone interview, referring to North America. “It shows you how profitable these businesses can be.”
GM gained 9.5 percent to $25.50 at the close in New York. It was the stock’s biggest one-day gain since its initial public offering in November 2010. The U.S. still holds about 500 million shares of GM, or 32 percent of the shares, and that stake increased in value by about $1.11 billion today.
“What we’re starting to see is the benefit from the focus and discipline we’re bringing to the business,” Ammann told reporters on a conference call today. “We’re continuing to make progress on tough situations in front of us, including the pension situation and making some modest headway in Europe.”
Ammann said GM will reveal more actions to improve its European operations later today.
“We’re obviously working on our cost and capacity reductions,” Ammann said.
The automaker is seeking a solution to its woes there through an alliance with Paris-based PSA Peugeot Citroen. (UG) GM and Peugeot said Oct. 24 they would jointly develop small and mid- size cars, vans and utility vehicles.
GM lost $478 million in Europe in the third quarter before interest and taxes, from an operating loss of $292 million a year earlier. GM’s struggling European operations have slid further as the region’s auto market has collapsed amid the stubborn sovereign-debt crisis. Auto sales may drop to their lowest level in 19 years, according to industry group ACEA.
Ford Motor Co. (F) said last week it plans to close three European factories and cut 6,200 jobs to achieve profitability in the region by mid-decade. Ford rose 5.8 percent to $10.96 on the first trading since it reported a better-than-estimated third-quarter profit yesterday.
“GM is actually too small and too weak to do what Ford is doing,” said Adam Jonas, a Morgan Stanley auto analyst who last month estimated that GM’s European Opel unit has a value of negative $17 billion and “represents the single biggest threat to GM’s long term financial health and sustainability.”
Despite the setbacks in Europe, Jonas recommends GM shares on the expectation they will rise to $44 on robust growth in North America, Brazil, Russia, India and China. He also said GM can isolate its European losses through a more formal partnership with PSA that removes the operation from the U.S. automaker’s balance sheet.
GM’s shares have fallen 9.9 percent in the past 12 months as Europe descended. GM fell 1.5 percent to $23.28 on Oct. 26, the last day before Hurricane Sandy caused New York trading to be suspended.
“We’ve identified four product programs that we’ve agreed to work on jointly now and that we’re continuing to work on the joint purchasing collaboration,” Ammann said. “We’re working on those and would expect to bring those to resolution in the coming weeks.”
GM also has said it plans to shutter its plant in Bochum, Germany, in 2016, the first car factory closing in that country since World War II. GM said it will eliminate one shift at an assembly plant in Eisenach, Germany, next year and is reviewing the status of its transmission plant in Strasbourg, France.
To adjust to the market collapse, GM cut third-quarter production in Europe by 27 percent to 196,000, Ammann said. That lowers revenue because the automaker books sales when it sends vehicles to dealers.
Third-quarter revenue rose to $37.6 billion from $36.7 billion last year. The average estimate of eight analysts was for $35.9 billion.
In North America, GM’s $1.82 billion earnings before interest and taxes compares with a $2.2 billion profit last year. In the year’s first half, GM earned $3.66 billion in the region, up from $3.5 billion the year before.
GM’s U.S. car and light-truck sales are up 3.4 percent so far this year to 1.97 million vehicles, according to researcher Autodata Corp. of Woodcliff Lake, New Jersey.
The average price U.S. consumers paid for a GM model fell less than 1 percent in the third quarter to $33,024, according to researcher Edmunds.com. The decline was caused by growing sales of new lower priced small cars such as the Buick Verano and Chevrolet Spark, said Ivan Drury, an analyst for the Santa Monica, California-based researcher.
GM’s average transaction prices in the U.S. have risen 21 percent since 2002 and 13 percent since 2007, according to Edmunds.
International operations, which include China, had earnings of $689 million, from a $365 million operating profit a year earlier. The increase came from regions other than China, where profit margins are under pressure, Ammann said.
GM slipped behind Volkswagen AG (VOW) in sales in the quarter in China. The U.S. automaker maintains a 77,000-vehicle sales lead over VW for the first nine months of 2012.
“We’d like to see a more robust market in China,” Chief Executive Officer Dan Akerson told reporters Oct. 21 in Sao Paulo. “To me, it’s not whether you’re the biggest car manufacturer. It’s whether you want to be the most profitable.”
GM’s South American unit posted operating income of $114 million, from a loss of $44 million in 2011’s third quarter. GM is introducing seven new models in Brazil this year in a push to turn around its operations in the region as China slows and Europe losses continue.
GM also provided an update on pension-buyout offers. About 30 percent of retirees offered pension buyouts took the lump-sum payout, the company said. Through annuitizations and lump-sum payments, about $29 billion of GM’s U.S. salaried pension liability is expected to be eliminated, compared with an original estimate of $26 billion, the automaker said.
GM offered buyouts to 42,000 pensioners, or about 36 percent of its salaried retirees, who left from Oct. 1, 1997, to Dec. 1, 2011. Those who refuse the lump-sum buyouts have their pension plan shifted to a unit of Prudential Financial Inc. along with the plans of other retired U.S. salaried workers, a deal GM expects to close early next month.
The company expects to make total cash contributions to its U.S. salaried pension plan of approximately $2.6 billion. GM will also record about $2.9 billion in pretax costs in the fourth quarter as a special item. GM originally estimated that it would make a cash contribution of $3.5 billion to $4.5 billion and record costs of $2.5 billion to $3.5 billion.
GM said it expects fourth quarter results to be similar to or slightly better than the same period a year earlier. The automaker’s outlook for the final three months of the year is cautious and lower than analysts’ estimates, Ryan Brinkman, an analyst for JPMorgan Chase & Co., wrote in an investment note today.
“Citing typical seasonality, 4Q appears guided down relative to Street expectations,” wrote Brinkman, who has an overweight rating on GM. “Still, the magnitude of 3Q beat offsets the incremental 4Q weakness.”
The biggest drag on GM remains the U.S. government’s 32 percent ownership stake, a legacy of the automaker’s 2009 federal bailout and bankruptcy, said Kee, the president of South Texas Money Management. Kee bought 500,000 shares of GM in February and expects to ride them up 30 percent to 50 percent as the U.S. economy recovers and housing comes back.
“GM has a slightly better cost structure because of the reorganization and a higher return on investment than Ford,” said Jim Kee, president of South Texas Money Management in San Antonio, referring to GM’s government-backed bankruptcy in 2009.
“GM also has the government red tape and that limits their options,” Kee said.
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