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Will GM's Profits Surprise?

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General Motors (NYSE: GM  ) is set to report its first-quarter earnings on Thursday morning. What should we expect from the world's largest automaker?

Analysts expect a pretty good quarter from GM, as it has held its ground in a growing market at home and posted some sales gains in key overseas markets like China. But it'll likely be a mixed bag, as several points of concern make it clear that GM's turnaround is still a work in progress.

Signs of strength, points of concern
Analysts expect GM's net income to come in around $1.4 billion, or in the neighborhood of 87 cents a share, on revenues of $37.9 billion, according to Bloomberg. That's a bit below the $1.7 billion (excluding one-time items) that GM managed in the year-ago quarter. Should shareholders be concerned?

I'm a shareholder, and I think the answer is "no," or at least "not yet."  I've been arguing for a while now that despite its low debt and several quarters of profitability, GM's turnaround is still a work in progress. GM's product-development programs are still racing to catch up from the ground lost during the company's death spiral. While competitors like Ford (NYSE: F  ) were able to continue making investments in new products through the worst of the economic crisis, GM's new-product programs were cut deep  -- and in some cases, scrapped altogether.

GM is still scrambling to catch up. Here's one example: The all-new Cadillac ATS sedan will arrive at dealers in a couple of months -- but really, it should have been out a couple of years ago. That car's development program was one of many that stalled during GM's descent into bankruptcy. Several other much-needed vehicles, including replacements for the General's all-important pickup trucks, won't arrive until next year -- and GM's promising plan for a global product-line revamp won't be fully realized for several years more.

That means, for the moment, GM is treading water to some extent. GM's sales in the U.S. -- still far and away its most important and most profitable market, despite the company's strength in China and elsewhere -- have been lagging a bit in recent months. Why? Because competitors with fresher products, competitors like Ford (NYSE: F  ) , Chrysler, Hyundai (OTC: HYMTF.PK), and lately Toyota (NYSE: TM  ) have been taking advantage.

What does all this have to do with GM's earnings? Quite a bit.

Results that reflect a work in progress
GM's big product development effort has resulted in higher levels of expenses in recent quarters, cutting into profits to some extent. I expect that to continue in this quarter -- so while GM's sales in the U.S. have been decent under the circumstances, and its sales in China have been growing faster than the overall market, I won't be surprised if profits are down, roughly in line with the estimates I mentioned.

Another factor that will weigh: Europe. GM CEO Dan Akerson has pushed aggressively to restructure the company's money-torching German subsidiary, Adam Opel AG, once and for all. That's a work in progress, likely to unfold over the next couple of years -- but meanwhile, GM's European division (which includes Opel) has seen declining sales and is likely to post a big loss.

Elsewhere? Sales in China have been strong despite a subdued overall market, but profits -- which are split with GM's local joint-venture partners, remember -- are likely to be relatively modest and affected by GM's ongoing investments in growth in the region. And GM South America, which posted a loss last quarter, should be improving with the arrival of much-needed fresh products.

The upshot: Expect incremental progress
Long story short, GM's turnaround still has a way to go, and I expect Thursday's earnings report to reflect that. While the General should book decent profits, its product issues -- and the investments it's making to improve -- will continue to weigh to some extent. Stay tuned.

Even though GM has been booking solid earnings lately, rising gas prices may be holding its share price down.  But meanwhile, the oil industry is reaping big profits. To learn more about an energy stock that appears poised to win big, grab your copy of this special free report from The Motley Fool.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. 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 (2) | Recommend This Article (1)

Comments from our Foolish Readers

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 May 03, 2012, at 12:01 PM, brent1985 wrote:

    People just need to buy Toyota and Honda so Japan can get the money and further their research and development programs, Chevy, Ford and Dodge just have dumb, fat lazy Americans in their research and development programs. Money needs to go overseas. GO TOYOTA!!!!!!!!!!!!!!!

  • Report this Comment On May 03, 2012, at 12:31 PM, TMFMarlowe wrote:

    @brent1985: Nice choice of user name, because 1985 called, and they'd like their auto-industry analysis back. Or put another way, you might want to test-drive some new cars (start with a Corolla and a Focus back-to-back) before you go too far with that line of thinking. The world has changed.

    John Rosevear

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