A New Hurdle Appears for General Motors Company, but Should Investors Care?

General Motors headquarters in Detroit. Source: GM.

Thursday's fourth-quarter report from General Motors (NYSE: GM  ) was a clear miss from Wall Street's perspective, and the stock dropped nearly 4% in pre-market trading before recovering throughout the day. Europe continues to drag down earnings -- no shocker there -- although GM is improving in the region. However, the quarter brought a new hurdle: a major decline in earnings from its "international operations" segment. Here are some details investors should keep in mind.

Ouch
By the numbers, General Motors' fourth quarter performance fell drastically short of expectations. Excluding special items, GM posted earnings of $0.67 per share, compared to expectations of $0.88 per share -- yikes. Meanwhile, GM only managed to grow its top-line revenue in the quarter by 3% to $40.5 billion, while profit checked in at $1.04 billion, down from last year's $1.19 billion. 

GM's "international operations" region, or GMIO, saw its pre-tax earnings cut drastically for the quarter and the full year.


Source: General Motors fourth-quarter presentation.

This region is a mix of areas that includes Asia, Africa, and Australia. Above, you can see the decline in full-year earnings, a loss that was aided by fourth-quarter earnings that were down to $208 million from $676 million a year ago. 

There are a couple of factors to help explain the decline in business. First, GM hinted that while Japanese automakers haven't created a price war here in North America with a weakened yen, they have put a lot of pressure on GM and other car makers in Australia and Southeast Asia. Here's one graph that illustrates this challenge:


Graph by author. Source: General Motors fourth-quarter presentation.

The graph essentially shows that GM's deliveries to China have increased as part of its plan to grow market share, yet the opposite happened. As Japanese automakers continued to regain footing after a yearlong Chinese consumer backlash due to a territorial dispute, they used a weakened yen to lower prices while remaining profitable, or created extra value by loading vehicles with features while leaving the price flat. Either strategy allows them to take more market share. With the many factors involved, and keeping in mind that one quarter is not a trend, investors should watch deliveries, inventories, and market share in China.

Investors were also initially concerned with GM's declining margin in China. In the first quarter of 2013 its margin checked in at 11.7%, then declined to 9.4% in the next two quarters, and finally checked in at 7.6% for the fourth quarter. However, that's not the full story. One of the major factors in GM's margin and profitability declines are two factories that are set to come on line shortly. Those factories, one operational, will help control GM's capital expenditure, while enabling the company to capture future growth -- let's not forget GM set a record for sales in China last year.

Darkest before the dawn
While these factors didn't spell good things for GM's fourth quarter, the situation should be turning around. General Motors will improve its margin in China as it launches a number of SUVs into the market, which bring in more profit than smaller vehicles. GM also plans to triple the sales of its Cadillac brand, the fastest growing full-line luxury lineup, between 2013 and 2015 -- a big win for investors and margins alike. GM seems to be focusing on the long haul now, a welcome change in strategy from decades past. GM's margins and profitability in China will return in time, and with the new long-term strategy the rest of the business should follow as well. 

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