GM Beats Estimates as New Product Push Begins


GM headquarters in Detroit. Photo credit: General Motors Co.

General Motors (NYSE: GM  ) said on Thursday morning that it earned a net profit of $1.2 billion in the second quarter, fueled by strong pickup sales in the U.S. and reduced losses in Europe.

Profit before taxes and special items was $0.84 a share, down from $0.90 in the year-ago quarter but well ahead of Wall Street's $0.77 estimate. Revenues of $39.1 billion beat the $38.6 billion Wall Street estimate, according to Bloomberg.

It's a good result, one that shows incremental progress for GM around the world – especially in Europe, which has long been a money pit for GM. Let's take a closer look.

Strong results in most of GM's regions
The best way to understand GM's results is to look at earnings from each of its global divisions in turn. Note that all of these profit and loss numbers are what GM calls "EBIT-Adjusted", meaning before taxes and interest charges. Because those vary from time to time, leaving them out makes it easier to compare today's results with past (and future) GM earnings statements.

  • North America earned just under $2 billion, up a bit from $1.9 billion in the year-ago quarter. Sales in the U.S. have been growing, and an industrywide boom in pickups has helped GM's profits a great deal here. GM is in the process of rolling out all-new pickups, and selling off the last of the old ones; high demand for pickups has meant that GM can clear out old stock without having to boost incentives, and that helped GM's operating margin growto 8.4% from 6.2% in the first quarter. But the costs of rolling out those new pickups also weighed on earnings somewhat, and will weigh again next quarter.
  • South America made $54 million, up from $16 million a year ago. As we saw with Ford's earnings on Wednesday, tough economic conditions in some South American countries together with exchange-rate pressures and stiff low-cost competition have made profits tough to come by in the region for GM. But competitive products have helped GM boost prices (or put another way, reduce discounts) despite the tough environment, and that had a lot to do with the gains in this region.
  • Europe, a problem area for GM for over a decade, lost $110 million, down from $394 million a year ago. This is a very significant result: Auto sales in Europe are at 20-year lows, and GM has been losing ground for months and months. GM executives have said that they hope to get to break-even in Europe by the end of 2015. But a huge restructuring last year that cut GM's costs has already had more of an effect than most analysts expected. A couple of hit new products, like the Opel Mokka SUV, are just icing on the cake.
  • International operations earned $228 million, down from $627 million a year ago. The problem here isn't China, where sales have been strong. It's a combination of increased investment in new facilities and weaker sales in markets like India, where sales of all but the lowest-cost vehicles have suffered recently.
  • GM Financial, the company's in-house financing arm, earned $254 million, up from $217 million a year ago. The income here rises and falls to some extent with the rhythm of GM's leasing business; it's a fine result.

Gearing up for a big global push
GM ended the quarter with $24.2 billion in cash, down just a bit from $24.3 billion in the first quarter, and total "automotive liquidity" – cash plus available credit lines, not counting GM Financial – of $34.8 billion.

Any time profits fall versus a year-ago result, investors get concerned, but there's a good story here. GM is in the early stages of a major product overhaul, launching a slew of new vehicles both at home and abroad. The costs of those launches were a drag on GM's second-quarter profits, and will be a drag for a few more quarters, but profits should go up as more and more of those new products hit dealers.

GM's latest products have been very strong. Last year's Cadillac ATS sedan was hailed as one of GM's best-ever products, and the new Chevy Impala just got a top review from Consumer Reports. Early reviews on the new Chevy Silverado and GMC Sierra pickups have also been quite favorable as well.

All of that bodes very well for GM's upcoming products, and it also bodes well for GM's profits: An automaker with very competitive products can get better prices for them, and that will improve its profits. That was a lesson that GM took a long time (and a bankruptcy) to learn; let's hope it's one that sticks.

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