GM Jumps Most Ever Promising to Stanch Losses in Europe
General Motors Co. (GM)’s biggest surprise yesterday wasn’t earnings that beat estimates by 55 percent. It was that it expects to break even by the middle of the decade in Europe, a region where it has lost $17.3 billion since 1999.
GM’s pledge to end losses that it said may reach $1.8 billion this year in as soon as three years puts it on the same pace as Ford Motor Co. (F) The second-largest U.S. automaker announced plans last week to close three factories in the next two years, eliminating 6,200 jobs, or 13 percent of its workforce in the region.
While GM’s plan doesn’t call for as many job cuts or plant closings, the Detroit-based automaker said it’s making moves that will cut costs by $200 million this year and $500 million annually beginning next year. That’s on par with the $450 million to $500 million in annual savings Ford promised from cutting its European factory capacity by 18 percent.
“Because Ford has tangible factory closings, investors are likely to deem it more credible,” said Brian Johnson, an analyst with Barclays that recommends both stocks.
Still, the higher-than-estimated earnings and the vow to become profitable in Europe boosted GM shares 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 stock, and that stake increased in value by about $1.11 billion yesterday.
GM said it’s reducing employment in Europe this year by 2,600, mostly through early retirements and voluntary separations. It’s trimming a shift at a factory in eastern Germany and put a transmission plant in Strasbourg, France, “under review.” GM’s biggest shutdown, at a Bochum, Germany, van plant, doesn’t come until 2016, two years after Ford’s closings.
“We’re managing to a cost number, not just taking out heads for the sake of taking out heads because it’s some statistic people put out,” Steve Girsky, GM’s vice chairman in charge of turning around its European operations, said on a conference call yesterday. “We’re not in the habit of announcing things and doing them. We’d rather do them and then announce them.”
Such reticence isn’t satisfying to everybody on Wall Street.
“Right now, these are just words on a page,” said Adam Jonas, a Morgan Stanley analyst who recommends the stock. “This is GM’s effort to manage the news flow. GM is trying to stay out of the headlines that don’t help them sell cars.”
Girsky said GM has already reduced factory capacity, such as closing a Belgium plant in 2010 and consolidating production of the Astra model in two plants instead of three. GM cut $300 million in fixed costs in Europe this year, mostly through stealth job reductions, he said.
“We’ve taken 2,600 people out this year,” Girsky said. “We didn’t say boo about it. We didn’t have a lot of fanfare. We just went out and did it.”
Even with the cuts GM has revealed, it will still have too much factory capacity, said Stefan Bauknecht, a Frankfurt-based portfolio manager at Deutsche Bank AG’s DWS unit, which owns GM stock.
“They have to really scale Opel down strongly, by closing Bochum and Kaiserslautern” factories in Germany, Bauknecht said.
GM also has the opportunity to boost image and prices on its Opel brand, battered by the parent company’s 2009 bankruptcy and strained relations with European unions, Girsky said. GM is introducing 23 new models in Europe by 2016.
“Our brand image has deteriorated over the last several years,” Girsky said. “The bankruptcy was part of it. The poor relations with the works council was another part of it. We are working very hard. We know we’re behind.”
That work is being done mostly by new leaders. GM has cleaned house in its European executive suite, eliminating three quarters of the top leaders there in the past year, Girsky said.
“We’re talking about a business with a culture that’s lost $14 billion over 10 years and we’re trying to break a mindset,” Girsky said. “You want to challenge the status quo. The way you do that is you move people around.”
The losses persisted in the third quarter. GM lost $478 million in Europe in the third quarter before interest and taxes, compared with 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.
GM said losses in Europe this year will run $1.5 billion to $1.8 billion. The automaker promised “slightly better” results in 2013, even as the European market continues to decline, and then the company will break even by “mid-decade.”
The news was better for GM in the rest of the world. Automotive earnings excluding Europe rose 4.3 percent in the third quarter to $2.63 billion, before interest and taxes, as it commanded higher prices for its models and expanded in emerging markets in Asia and South America.
GM’s earnings per share excluding one-time items totaled 93 cents, beating the 60-cent average estimate of 17 analysts surveyed by Bloomberg. GM’s net income slipped to $1.83 billion from $2.1 billion a year earlier.
Ford also beat analysts’ expectations by earning $1.63 billion in the third quarter, driven by record pretax profit of $2.3 billion in North America. Dearborn, Michigan-based Ford’s North American turnaround has given analysts confidence it can revive Europe. There was less optimism about GM’s plan because it lacked specifics, wrote Peter Nesvold, an analyst with Jefferies & Co.
“The company is targeting break-even by mid-decade (mirroring Ford’s targets), although without a plan it’s difficult to critique the viability of this forecast,” Nesvold, who rates GM a hold, said in a note to investors yesterday. “GM’s mid-decade targets won’t have quite the same weight as Ford’s.”
One thing GM has that Ford doesn’t: A broad-based 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. They are also close to finalizing a deal to reduce costs through shared parts purchasing, Dan Ammann, GM’s chief financial officer, said yesterday.
“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 seemed to downplay the potential of its PSA alliance yesterday, Morgan Stanley’s Jonas said. Some have viewed that partnership as a way for GM to offload its unprofitable European operations, Jonas said. Girsky declined to comment on the potential for a larger tie-up with PSA or any other automaker.
The PSA partnership “only occupied one bullet point and it was the last bullet point on one page,” Jonas said of GM executives’ presentation to analysts yesterday. “Maybe that was conspicuous by its lack of content.”
The French government on Oct. 24 committed $9 billion in state credit guarantees to Peugeot’s finance unit to help prop up Europe’s second-largest automaker.
“I don’t expect any proper solution from the alliance between GM and Peugeot,” said Bauknecht, the portfolio manager at Deutsche Bank. “The two weakest players in the market are going hand-in-hand to conquer the auto markets in Europe and the world. I don’t see this as a realistic scenario.”
GM’s weakness in Europe may be the very reason it can achieve break-even by mid-decade, said Johnson of Barclays.
“It’s the glass quarter-full and three-quarters empty,” Johnson said. “Because their product line has aged and been underinvested in, even though they’re not starting from where Ford is, there’s arguably more room to claw their way back up.”
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