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A Big Quarter for General Motors

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File this one under "making hay while the sun shines": General Motors (NYSE: GM  ) blew away expectations with $2.5 billion of net income in the second quarter. That's $1.54 a share, well ahead of the $1.20 consensus estimate, and a big jump over the $1.33 billion GM posted in the second quarter of 2010. It's also ahead of the $2.4 billion result reported last week by rival Ford (NYSE: F  ) -- a company that has seemed to be much further along with its turnaround.

Even better, unlike last quarter's eye-popping headline number, this one's free of special, one-time items. That $2.5 billion is real money, making for GM's sixth consecutive profitable quarter, and it's the result of strong performances in GM's businesses throughout the world.

How'd they do it? The old-fashioned way: by stepping up when competitors faltered.

Japan's loss is Detroit's gain
GM's 19% increase in revenues, to $39.4 billion, came during a quarter where the overall level of U.S. auto sales was down significantly. Already well below historical norms early in the year, sales fell to an annualized rate well below 12 million in the wake of the March earthquake and tsunami in Japan.

The disaster decimated key suppliers to companies like Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) and left the two Japanese giants with shortages of popular fuel-efficient models -- just as U.S. consumers, driven by high gas prices and a newfound frugality, were finally starting to turn to smaller cars in larger numbers.

While Ford struggled with short supplies of its acclaimed new Focus compact, whether because the Blue Oval had misjudged demand or because of a supply problem, GM was able to move more than 20,000 copies of the Chevrolet Cruze every month during the quarter (and again in July). The Cruze is the second-best-selling compact so far this year, according to Edmunds -- a big achievement for an all-new nameplate, and a bigger one for a car in a segment where GM's entries have historically been phoned-in afterthoughts.

Strong results across the board
The Cruze's success is one part of the picture, but a bigger one is that selling prices are up across the board and incentives -- finally! -- are down. GM's profit per vehicle is up significantly around the world, and that alone probably contributed $1 billion to the bottom line during the quarter, executives said.

That contribution meant that all of GM's global regions were profitable -- for the first time in years:

  • North America reported pre-tax income of $2.2 billion, a $600 million improvement over year-ago numbers;
  • Europe, GM's longtime problem area, made $102 million before taxes, a solid improvement over the $160 million loss incurred in the year-ago quarter. In addition, the company noted that ongoing restructuring costs were $100 million, down from about $300 million a year ago.
  • South America made $57 million before taxes, down from $195 million a year ago.
  • The International Operations unit, which includes Russia, India, and China, made $573 million, up from $504 million a year ago.

All of this helped further the company's goal of what executives call a "fortress balance sheet." GM ended the quarter with total "automotive liquidity," a term denoting cash and credit outside of its finance arm, of $39.7 billion, including almost $34 billion in cash.

A subdued outlook, but not a worrisome one
Like crosstown rival Ford, GM sought to temper expectations for the remainder of the year. The Detroit automakers are traditionally less profitable in the second half of the year, as costs for new-model-year product launches weigh on earnings somewhat. But this year's results could be further complicated by the ongoing economic uncertainty. Will strapped consumers keep buying cars?

Those newly fattened margins could also get squeezed by a brewing sales war: Toyota executives said earlier this week that they intend to be aggressive with marketing and incentives in the U.S. this fall, seeking to regain lost market share once the company's production capacity is fully restored.

The upshot is that GM's earnings might narrow, but the General's greatly improved cost structure should keep it in the black -- even if the economy gets seriously sour.

A big value play in the making?
The economy and Toyota's impending resurgence may continue to weigh on GM's stock price for a while, but I'm starting to think there's a big opportunity brewing here. Consider this: GM's stock closed at $27.05 Tuesday, a post-IPO low and a level that left the Detroit giant with a market cap of about $40 billion. Again, GM has almost $34 billion in cash, and minimal debt.

Think about that math. While this turnaround still has a ways to go, and the U.S. government still owns more of GM than everyone would like, this is starting to look like a big value opportunity. At some point, the market is going to wake up and realize that the bumbling old General of yesteryear really is turning into a very different kind of company.

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Fool contributor John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 04, 2011, at 2:06 PM, Brettze wrote:

    Why are you keeping us forgetting about UAW and their mischievous dealings? GM and Ford is subpar to Honda and Toyota valuations in stock prices . UAW is clearly anti shareholder , simple as that. Management cannot help but keep on bumbling along on intent ... There ought to be laws passed to muzzle unions at certain junctions..

  • Report this Comment On August 04, 2011, at 2:13 PM, Brettze wrote:

    As far as I can see, I am so certain that Japanese and even Korean carmakers will continue to gain market share here in America . UAW just dont understand why its membership keep dropping ... and will continue to do so. UAW demands force managements to choose inferior parts to save a few cents each but we end up paying hundreds of dollars in unnecessary repairs due to inferior lifecycles of cheap parts chosen by management inorder to pay to UAW demands.. no matter how small they are.. No wonder carbuyers are giving up on Detroit.. Despite current excitement about latest models being introduced by Detroit, I still have a gnawing feeling that inferior parts are still used.. Why is it that Hondas and Toyotas keep running trouble free while Detroit's cannot ??? UAW asked for a little too much that made all the lousy differences in the long run! Cant UAW understand that shareholders has to be treated right??? Come to your own senses, UAW! You had done so much self inflicted damage upon yourselves !! When will you ever stop??

    Now , get your talks under wraps ASAP!! Shareholders are waiting >>>

  • Report this Comment On August 04, 2011, at 2:17 PM, Brettze wrote:

    UAW, the bottom line is you got to help Detroit win back market share from Japan.. This is the most important thing you gotto do.. I dont care what you want to talk about yourcontract for next 4 years as long as you make plans to win back market share for us shareholders.. This means cars with great parts not inferior ones from second tier suppliers eager to win bids... I wont mind inferior tires but powertrain components and auxullliary parts like air conditioning , etc is a no no!! See what I am saying?? NObody is anxious to pay mechanics to fix repair parts whichis so dreadful and budget busting!

  • Report this Comment On August 04, 2011, at 9:43 PM, baldheadeddork wrote:

    ^ Wow. Three posts to say the same thing - and they say UAW workers are inefficient.

    Props to GM for a strong quarter, but can you forgive me if I say GM's results actually underline how much better Ford is doing? GM netted $2.5b selling 2.4 million cars in the quarter. That edges out Ford's profit of $2.4b, but Ford built 900,000 fewer cars. No kidding, Ford's profit per vehicle is 53% greater than GM. (And that's with Ford spending a lot of its gross profits on debt reduction and maintenance.)

    The tea leaves of the 2Q numbers tell me the source of the difference in profitability is in what most people think is GM's ace in the hole - China. In the last quarter, GM's sold over a million cars in its International Operations sector. Almost all of that is in China, including 700,000 units with the FAW-GM and SGMW Chinese joint ventures.

    It's been well known (if unacknowledged by GM) that profits in China are thin even before they're divided up with JV partners. But how does that effect GM's profitability as raw material costs rise and the Chinese government tries to keep inflation under control?

  • Report this Comment On August 04, 2011, at 10:02 PM, TheDumbMoney wrote:

    1) Brettze and others need to look at how much of GM the UAW NOW OWNS. The UAW is or was like a 20% shareholder (or was when the VEBA deal closed). The UAW is the Man now, unless they have sold shares (I know they have sold 1/3, not sure about the rest). If they still own shares, those folks are going to have to do more than suck uncle GM dry. This is something you Fool guys should comment on. Even so, I think the UAW finally understands it got a new least on life, and it can't eat the golden goose in a global economy.

    2) Also, I'm pretty sure the UAW agreed it could not strike against any of the Big Three until 2015.... That's worth thinking about.

    3) "Again, GM has almost $34 billion in cash, and minimal debt. Think about that math." -- Yeah but I think they have pretty significant pension obligations, even after the VEBA

    4) Bargaining ongoing now on a new labor contract, if I'm not mistaken. Anyone interested in GM should see how that pans out.

    Can you tell GM is on my watchlist? :-)

  • Report this Comment On August 05, 2011, at 12:17 PM, TMFMarlowe wrote:

    @dumberthanafool: You're right, GM still had about $10.8 billion of pension liability at the end of Q2. But that's down from $15.8 billion a year ago, and it's looking less and less like it's going to be a major problem for them.

    You're also right that F is making more per vehicle, but I'd counter-argue that GM's product-line overhaul is probably 3 years behind F and they're *still* making good money in a slow-selling market.

    I'll have more on the upcoming labor negotiations early next week.

    Thanks for reading.

    John Rosevear

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