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

Automotive companies have been an intriguing play during the industry's rebound, but a new hurdle has appeared for GM. Is it still a good investment?

Feb 7, 2014 at 11:00AM

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.

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. 

Is GM one of the automakers on a tear in this surging auto market?
U.S. automakers boomed after WWII, but the coming boom in the Chinese auto market will put that surge to shame! As Chinese consumers grow richer, savvy investors can take advantage of this once-in-a-lifetime opportunity with the help from this brand-new Motley Fool report that identifies two automakers to buy for a surging Chinese market. It's completely free -- just click here to gain access.

Daniel Miller owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers