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The first headlines to appear after General Motors (NYSE: GM ) released its earnings last Thursday were laudatory, and for seemingly good reason: GM's headline number, $3.2 billion in earnings ($1.77 a share), was more than triple last year's number and sounded like an expectations-trouncing win. After all, mighty Ford (NYSE: F ) "only" managed $2.55 billion in the first quarter while firing on all cylinders.
But then analysts weighed in and the stock started diving. A closer look at GM's numbers showed that $1.5 billion of that outsized profit was due to one-time items: sales of the Detroit giant's interests in Delphi Automotive and Ally Financial. Without those gains, GM's earnings were up a more modest-looking 18% from last year, and its all-important North American profits were up just 8% despite strong-looking revenues.
So was it a good quarter for GM, or a bad one?
Wall Street's asking the wrong question
Here's how GM CEO Dan Akerson opened his remarks on a conference call for analysts following the earnings release: "We are making steady progress, but we have a lot more work to do."
He's right. Why were North American profits low despite a $2.82 billion increase in sales? Because the company spent a lot more money -- "higher operating expenses," as Bloomberg put it, took a $700 million bite out of profits. Now, $300 million of that was due to incentives spending (more on that in a minute), but the rest was split roughly evenly between increased spending on engineering and marketing.
Why does an automaker increase spending on engineering? To develop new products. Why increase marketing spending? To launch new products.
What does GM need more than anything else to get its turnaround to the level of Ford's? New products.
So is that extra spending good news or bad news?
A better way to view the quarter, and GM
It's probably not fair to be expecting Ford-like blowouts from GM quite yet. Investors in GM should be viewing the company with a (at least) three- or four-year horizon. It's going to take the General at least a couple of years to rework its key products, and until those products hit dealers, GM isn't likely to be posting per-vehicle revenues that are as gaudy as Ford's. Despite the fact that GM is solidly profitable with minimal debt, this is very much a turnaround in progress.
Product-wise, GM is where Ford was in 2008 or so. The company's most recent products are world-class and give us strong reasons for optimism about the future -- but right now, the older products are less competitive and sales will continue to rely on discounts.
What I, as a GM investor, want to see from quarter to quarter is progress on that turnaround. I want to see new products that get strong reviews and gain traction in the market. I want to see sensible expansions of international operations. I want to see cash and liabilities managed in the right way. I want to see GM making moves that make sense -- and not making moves that don't.
So what'd we get this quarter? Progress:
- A solid financial position. As of the end of the quarter, GM had almost $30 billion in cash and a modest $5 billion in debt. The company's underfunded pension liability, a point of concern for shareholders since the IPO, is now below $10 billion.
- Big success for the Cruze. The Chevy Cruze, GM's best small car in approximately forever, is selling briskly and continues to earn accolades. Some recent reviews of Honda's (NYSE: HMC ) latest Civic, for decades the gold standard in the category, have compared the Civic unfavorably to the Cruze -- something unthinkable just a few years ago. The ongoing earthquake-related struggles of Honda and Toyota (NYSE: TM ) won't hurt sales going forward, either.
- Emerging markets on track. China's blue-hot auto market may be softening, but GM and its joint-venture partners are still leading it with a 13.6% share. Meanwhile, GM's investing in South America in a big way, with 2,000 new hires in Brazil and 40 new or upgraded products due by the end of next year. "South America is the new version of what China or Asia was a year or two ago," said Akerson on Thursday, and GM plans to compete in a big way.
- High incentives are falling. I took GM to task last week after Edmundsprojected that the company's April incentives spending would significantly outpace competitors'. But during its presentation Thursday, GM's management argued that incentives are coming down, and presented data that showed April incentives well below Edmunds' projections. In fact, according to J.D. Power information presented by GM, the company's April incentives ran at 8.6% of the average transaction price, a bit below the industry's average (and down sharply from the company's spending during the first quarter). If GM can sustain this trend, that's good news.
The to-do list is still long
Obviously, GM still has, as Akerson said up front on Thursday, lots of work to do. Product development is continuing at a fevered pace, and that, plus launch costs as those products come to market, will continue to be expensive. Akerson sees continued room for improvement both on costs and on internal processes related to product development, which he sees as too cumbersome. Akerson also alluded to a desire to "drive brand identity deeper into the organization," a hint that further work needs to be done on GM's long-troubled corporate culture.
Despite pouty comments from analysts and the still-stuck share price, long-term GM shareholders should be encouraged. GM's recovery is very much still a complex, unfolding process, but for now, it appears that the General is on track.