General Motors (NYSE: GM ) is set to report third-quarter earnings on Wednesday morning, before the market opens. What should we expect?
Well, 17 Wall Street analysts polled by Bloomberg are expecting an average of $0.93 a share in profits. That would be down a little from GM's profit in the third quarter of last year, when the Detroit giant earned $1.48 billion, or $0.94 a share before special items.
Does that seem spot-on? Let's take a look.
Mixed prospects for GM's global business segments
General Motors divides its global business into five major "segments," which include GM's captive financing unit and the company's four regional auto operations. Let's look at each in turn.
- North America is no longer the region where GM sells the most vehicles, but it's still the region that generates the bulk of the company's profits. GM earned $1.8 billion in its home region in the third quarter of 2012. And last quarter, GM earned just under $2 billion in North America, as it was on the verge of rolling out its all-new pickups. Sales of the new trucks have been decent, despite aggressive discounts from rival Ford (NYSE: F ) -- but more importantly, the average transaction prices on the new trucks have been strong, suggesting that GM will book more profit per truck sold. There are many other variables to consider, including the costs of launching the new pickups, but that alone could bump profits up a bit.
- South America has been a tough environment for both GM and Ford, as tough competition from Asia and unfavorable exchange-rate swings have hampered profits in recent quarters. GM made $114 million here a year ago; a similar result seems likely this time around.
- Europe has been a money pit for GM for years, but in recent quarters we've seen some signs that things are finally heading in the right direction. In the third quarter of 2012, GM lost $478 million in Europe -- and believe it or not, that was better than expected. Things have improved since, and last quarter's loss was "just" $110 million. It's far too early to hope for a profit -- that's not likely before 2015, GM has said -- but a loss in the $100 million range would suggest that the turnaround remains on course.
- International operations is GM's catch-all for the rest of the world. Results here are dominated by China, now the world's largest new-vehicle market -- and one that GM has led for the past eight years. Sales in China have been solid, and GM has reliably been netting around half a billion dollars a quarter from its Chinese joint ventures. But GM is making big investments in new factories in the region -- it's expected to spend $11 billion by 2016, a sum that will be funded out of its earnings in Asia. Those investments knocked the segment's profits down to $228 million last quarter, and a similarly subdued result wouldn't be a surprise this time around.
- GM Financial is the company's in-house financing arm, providing leasing programs and low-cost loans to GM customers and dealers. To some extent, its income follows the ups and downs of GM's U.S. leasing business, which has been on a modest upswing. GM Financial earned $254 million last quarter; a similar result seems likely this time around.
The upshot: A small upside surprise seems likely
Long story short, compared to last year, South America should be about the same, international operations will likely be down, and Europe should be up (or put another way, its losses should be much less).
Assuming that all roughly balances out, the variable here is North America. On the one hand, GM has introduced a slew of new products last year, and new products are more profitable than old ones as a general rule. On the other hand, costs related to GM's new-product push, and specifically to the launch of the new Chevy Silverado and GMC Sierra pickups, could weigh somewhat on results.
But I think the net result will be a modest boost in profits in North America and an overall profit a little higher than what Wall Street is expecting. We'll find out on Wednesday.
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