General Motors Beats Estimates as Margins Improve

GM's decision to be stingy with discounts on its new Chevy Silverado may have dented sales, but it helped GM to strong profit margins in the third quarter. Photo credit: General Motors Co.

General Motors (NYSE: GM  ) said on Wednesday that it earned $2.6 billion in the third quarter on an adjusted pre-tax basis, a strong result that reflected big gains in North America, and continued improvements overseas.

GM's pre-tax profits, excluding special items, was $0.96 a share, enough to beat the Wall Street average estimate of $0.93 a share. It was also well ahead of the solid $0.94 per-share profit that was posted by GM in the third quarter of 2012.

Strong margins at home, improvements overseas
The best way to understand GM's earnings report is to look at each of the automaker's global business units, or what GM calls its "segments," in turn. 

Here's how things shook out for GM in the third quarter. Note that these numbers don't include the impact of taxes or interest charges, as that's how GM reports them.

  • North America continues to be GM's most-profitable business segment. GM earned nearly $2.2 billion in North America in the third quarter, a big improvement over the $1.7 billion it earned in the year-ago period. Costs were up, in part because of GM's new-product launches; but that increase was more than offset by GM's improved pricing power and favorable product "mix," the ratio of more-profitable products to lesser ones. Those more-profitable products include GM's all-new pickups, which have generated much-improved average transaction prices. GM's operating margin in its home region rose to 9.4%. That still trails Ford's (NYSE: F  ) impressive 10.5% margin in North America, but it represents significant progress for GM.
  • Europe lost $214 million, better than analysts had expected, and a big improvement over the $487 million loss posted by GM Europe a year ago. GM's costs in Europe have improved significantly over the last year as the company's aggressive restructuring efforts continue to yield improvements. But a market that remains mired in recession continues to keep GM's European operation in the red, and a profit remains unlikely before 2015.
  • International operations includes GM's huge effort in China. The segment earned $299 million during the quarter, down from $761 million a year ago. Revenue from GM's Chinese joint ventures was actually up slightly, even as GM and its Chinese partners invest heavily in an aggressive expansion effort. But a major recall in India and competitive pressures elsewhere weighed heavily.
  • South America earned $284 million in the third quarter, up from $159 million a year ago. Gains on pricing and product mix helped GM gain ground in a region where competition has become fierce over the last couple of years.
  • GM Financial, the company's captive-financing arm, earned $239 million, up from $200 million a year ago. U.S. lease penetration is up to 21.3%, from 16.2% a year ago -- a good gain. Subprime loans have fallen as a percentage of the unit's overall portfolio, from 8.1%, to 7.8%.

Special items and GM's cash flow
Special items did weigh heavily on GM's net profit number, which was just $698 million for the quarter. As expected, those items included an $800 million charge related to GM's repurchase of preferred stock from a UAW health-care trust that had received it while GM was in bankruptcy. GM also reported a one-time incremental tax expense of about $500 million.

GM's free cash flow from its automotive business was $1.3 billion during the quarter, up a bit from $1.2 billion a year ago. The company said it had $26.8 billion in cash at the end of the quarter, up from $24.2 billion last quarter. Including available credit lines, GM had a very strong $37.3 billion in total liquidity.

The upshot: GM remains on track
GM still has work to do, of course. Its North American margins still trail Ford's, which have become a benchmark of sorts. Work continues on ongoing restructuring in Europe. And while GM's sales in China have been strong, the company has only a tiny presence in China's booming -- and extremely profitable -- luxury-car space. 

GM CEO Dan Akerson has efforts under way to address all of those concerns. For GM shareholders, the takeaway from GM's third-quarter results is that, for the most part, Akerson and his team have GM on the right track and are making good progress.

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Editor's note: A previous version of this article misstated the trajectory of GM's international operations revenue from joint ventures in China. The Motley Fool regrets the error.

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