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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.
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