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General Motors (GM) …One Year Later

By: , dated November 21st, 2011

Earlier this month, General Motors (GM: Charts, News) posted third quarter earnings that beat all analysts’ estimates but still fell short of improving over the previous year. Despite being profitable in all four global regions last quarter, GM incurred losses in South America and Europe, while remaining profitable in its core North American market. The Detroit-based automaker posted earnings of $1.7 million, or $1.03 per share, a 15% decline from the $2 billion it posted in the prior year quarter. Revenue rose 7.6% from $34.1 to $36.7 billion. Analysts had been expecting 96 cents per share on revenue of $1.54 billion. A year after its highly publicized IPO, which followed its bankruptcy and government restructuring, General Motors is still struggling. General Motors’ brands, which include Chevrolet, Cadillac, Baojun, Buick, GMC, Holden, Daewoo, Isuzu, Jiefang, Opel, Vauxhall and Wuling, are sold in 30 countries. Most analysts, however, believe that the stock is considerably undervalued and will bounce back past its IPO price once the global macro environment stabilizes. In addition, GM beat both of its Detroit steel rivals, Ford (F: Charts, News) and Chrysler Group in terms of profits. Ford and Chrysler earned $1.6 billion and $212 million in the third quarter, respectively.

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In North America, GM earned $2.2 billion due to more efficient marketing and the weakness of its primary Japanese rivals. GM’s third quarter results were strong domestically but weak internationally, hampered by a strong U.S. dollar, which caused foreign-exchange losses across the world. The U.S. dollar and the Japanese yen have been propped up as safe-haven currencies due to the uncertain future of the Eurozone. GM also took losses on the currency hedges with the Korean won, which caused a loss of $77 million. GM’s international unit, which boosted earnings when the dollar was weak, posted profits of $365 million, a 29% decline from the $516 million it earned a year ago. The company attributed the losses to a strong U.S. dollar and an increased demand for cheaper vehicles – which the company cannot produce given current exchange rates. The company’s profit margins, at 6%, are strong, but are still lower than other global automakers, which average around 7.5%.

In South America, one of the great emerging markets, GM broke even, a big drop from the $163 million it earned the previous year. Meanwhile, GM lost $292 million in Europe, a 48% improvement over the prior year, but continuing its 11 consecutive years of losses in the troubled region. CEO Dan Akerson addressed the two areas, stating, “Results there are not sustainable and not acceptable.” In South America, GM cut its workforce by 4%, but Akerson has stated that the company would “have to go deeper” to stay in the black. In particular, the strong real has adversely impacted its pricing power in Brazil, considered one of fastest growing auto markets in the world. GM is also restructuring its European operations and expects to post profitable results in Europe by fiscal 2012. That’s a hefty promise, but if GM can break a decade long cycle of losses in Europe, then it can quickly regain the faith of investors and the U.S. government, which still holds a majority stake in the company. GM stated that its fourth-quarter earnings will be more in line with the previous year’s earnings.

The troubles plaguing GM have also been haunting its domestic and Japanese rivals. Japanese automakers Toyota (TM: Charts, News) and Honda (HMC: Charts, News) are considerably worse off, with the twin disasters of the March earthquake and the floods in Thailand crippling their supply chains. Meanwhile, a strong yen has hurt the Japanese automakers’ pricing power in foreign markets as well. GM is well positioned to capitalize on the weakness of its primary rivals, with some analysts believing that the company could overtake Toyota as the world’s largest automaker by next year. A gradually weakening dollar could also aid its fourth quarter results. So far in the fourth quarter, the U.S. dollar index has declined 1.4% compared to prior year. The company currently trades with a tiny P/E of 4.7 and has no net debt, and currently rests near all-time lows, which should appeal to patient value investors with a long investment time frame.

Other News About GM

GM earnings: Not ‘good enough’

Despite strong numbers, GM fails to improve over the previous year.

GM’s 3Q earnings drop 15%

GM’s profit slides on international weakness and a strong dollar.
Other Stocks in the News

Toyota Motor Corp. Recalls 550,000 Vehicles

Toyota’s quality control unit announces another embarrassing recall.

Flood impact on Honda spreads, Toyota slowly recovers

Japanese automakers still reeling from the dual impact of the March earthquake and the Thailand floods.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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