General Motors Company Reports a Profit Despite Huge Recall Costs

Strong sales (and strong selling prices) for the well-regarded Chevy Impala helped GM beat estimates in the first quarter. Photo: General Motors Company

General Motors' (NYSE: GM  ) first-quarter profits fell 82% from those of a year ago, as a huge charge for recall costs weighed -- but it came in ahead of Wall Street estimates, thanks to GM's newfound discipline around pricing and incentives.

GM earned just $213 million for the quarter, before the effect of dividend payments on preferred stock, down sharply from the $1.18 billion it reported a year ago. But excluding one-time items, GM's profit of $0.29 a share was well ahead of the $0.04 expected by Wall Street analysts.

GM's profit exceeded estimates thanks to its disciplined approach to pricing on its latest products, particularly its all-new Chevrolet Silverado and GMC Sierra pickups. That discipline helped keep GM's quarter in profitable territory, even as a $1.3 billion charge for costs related to its recent recalls, which was expected, cancelled out much of its gains.

It was both a good quarter and a tough one
On the one hand, this was GM's worst quarter since 2009. As expected, a $1.3 billion charge for costs related to GM's ongoing recall debacle was a heavy hit, as were additional charges, also expected, that were related to Venezuela's currency devaluation and GM's ongoing restructuring in Europe. 

On the other hand, if it weren't for the recalls, GM would have a pretty good story to tell.

GM North America
GM's North American region posted a pre-tax profit of $557 million for the quarter. That's down from the $1.4 billion it made a year ago, but that includes the effect of the $1.3 billion in recall charges. Without the recall charges, profits would have been close to $1.9 billion -- a significant year-over-year gain made possible by GM's disciplined approach to pricing on its newest products.

The 2014 Chevy Silverado. Higher-trim versions like this luxurious High Country model, which starts at over $46,000, have helped boost prices and profits. Photo: General Motors Co.

Even as rivals have resorted to heavy discounting in search of sales gains in the huge and competitive pickup truck market, GM has kept incentives on its new-for-2014 pickups at levels far lower than in the past. The result: Average transaction prices on GM's pickups were up more than $3,800 in March versus a year ago. The story has been similar with other new GM products, including the Chevy Impala and Cadillac CTS sedans. 

Long story short: While the company has lost some market share in the full-sized pickup segment because of its limited discounts, it's making more profit on every truck sold -- and the net effect appears to be working solidly in GM's favor.

GM South America
South America has been a trouble spot for both GM and rival Ford (NYSE: F  ) of late, as currency devaluations and ongoing political disruptions in Venezuela have brought sales close to a halt and forced both automakers to revalue assets in unfavorable ways. GM lost $156 million in South America during the quarter, down from a loss of $38 million a year ago. Venezuela's disruptions are largely to blame, though a slowdown in Brazil also contributed to the drop.

GM Europe
GM's European branch has been a trouble spot for over a decade, but an aggressive overhaul effort has led to significant improvements over the last year. GM lost $284 million in Europe in the first quarter. That's down from $152 million a year ago, but it includes the effects of about $200 million in costs related to that ongoing restructuring effort. 

In recent quarters, GM has pulled the struggling Chevrolet brand out of Europe, overhauled the management team and many parts of German subsidiary Opel, and agreed to close a factory in Germany. Meanwhile, Opel has brought out a couple of strong new models and is gaining ground amid a sluggish recovery in new-vehicle sales in Europe. 

GM has been aiming to return to break-even in Europe by the end of 2015. That target date still stands, but the company did say on Thursday that Europe has recently been doing better than it expected. 

GM International Operations
GM's catch-all division for the rest of the world, which includes its massive joint ventures in China, earned $252 million for the quarter. That's down from $472 million a year ago. For the region as a whole, sales volumes were down, and "mix" -- the ratio of sales of more profitable larger and luxury vehicles to those of less profitable small ones -- was also unfavorable on a year-over-year basis.

But the region's equity income -- which mostly comes from GM's three huge joint ventures in China, and which GM reports on an after-tax basis -- was $598 billion, up from $541 billion a year ago. 

The takeaway in a nutshell: Despite the heavy investments GM is making to expand in China, its profits in China were up -- but sluggish sales elsewhere hurt a bit.

GM Financial
GM's in-house lending arm made $221 million for the quarter, up from $180 million a year ago. That's not exactly a perfect comparison, as the current number includes some international operations that GM purchased in 2013 that weren't part of the unit in the year-ago quarter. But the story is still a good one: Leasing is up a bit in the U.S. (and up sharply in Canada), and credit losses are down to just 1.8% from 2.6% a year ago. 

The upshot: Behind the tough headlines, the good story is still unfolding
As I said up front, GM reported good news and bad news.

The good: GM's strategy of holding the line on pricing even at the expense of some sales is paying off in North America. After years of flailing, its ongoing restructuring effort in Europe is finally making real progress. And China, where GM recently announced a massive expansion effort, continues to be a solid performing market.

The bad: South America is a drag, but it's nothing compared to the recall mess. GM's recall of 2.59 million vehicles for faulty ignition switches will continue to weigh on earnings for a while. 

This quarter's charge of $700 million for costs related to replacing those switches was a big hit, as was the additional roughly $600 million in other recall-related charges, but ongoing litigation and potential federal and state fines could lead to more big charges in quarters to come. 

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Read/Post Comments (12) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 24, 2014, at 10:53 AM, AmericanFirst wrote:

    Let's see March YTD, the Ford Fusion has outsold the Malibu & Impala combined, GM trucks have lost market share. Plus, GM earnings supported on backs of defaulted bondholders / corp. income tax benefits per the GM B/O.............the facts!

  • Report this Comment On April 24, 2014, at 11:09 AM, funfundvierzig wrote:

    The bombastic GM Chieftess, MARY emBARRAssment, bragged this morning, “The performance of our core operations was very strong this quarter,..." If Ms. Barra believe this is a "very strong" quarter, we would hate to see a weak quarter at GM. How low is the bar set for this motorcar company in decline? ...funfun..

  • Report this Comment On April 24, 2014, at 11:09 AM, TMFMarlowe wrote:

    Hey AmericanFirst, it's definitely true that the Malibu was a missed opportunity for GM. But while you're listing "facts", how about comparing Impala sales to the Taurus's for a little more of an apples-to-apples thing? Ford's lineup doesn't have many weak spots right now, but that's one. New one comes next year; it needs to be a big improvement.

    As for GM's trucks, I'll trade a small loss of market share for a big jump in profits. The Ram was the big market share winner in Q1, but Chrysler spent big to make that happen... let's wait and see how much money Chrysler made in North America in the quarter before we get too excited about market share gains.

    On the other other hand, Ford's numbers should look nice when they come out tomorrow. They'll take a big hit from the Venezuela thing, but NA was strong, and China was super-strong.

    John Rosevear

  • Report this Comment On April 24, 2014, at 11:12 AM, TMFMarlowe wrote:

    @funfundvierzig: Except for the recall mess -- which is one whopper of an exception, I'll grant you -- she's not wrong. North America, Europe, and China are all headed in the right direction -- certainly not "in decline". Like I said, it's bad news AND good news, depending on your perspective.

    John Rosevear

  • Report this Comment On April 24, 2014, at 11:20 AM, SkepikI wrote:

    JR- Can't resist tweaking you a bit for looking to Chrysler for anything, even "buying market share gains". Chrysler should be relegated to the ash heap of history and put out of its misery humanely- maybe Fiat will do what the US government could not bring itself to do....

    Of course, nobody, including Chrysler is so useless that they can't serve as a bad example......

  • Report this Comment On April 24, 2014, at 11:25 AM, TMFMarlowe wrote:

    @Skepikl: Expectations have been very low for Chrysler since 2009, but the Fiat-Chrysler mashup has kept outperforming them. Low bar, maybe, but it's an interesting story. I'm very curious to see where it goes.

    The Ram 1500 with the 5.7 is a pretty nice truck to drive, actually. They're selling an awful lot of them, albeit with some awfully big discounts, but still.

    John Rosevear

  • Report this Comment On April 24, 2014, at 11:30 AM, funfundvierzig wrote:

    John Rosevear, thank you for your thoughtful response. "Very strong or not", investors and traders at the moment are not exactly buying into Ms. Barra's somewhat Pollyannaish pronouncement. GM is up just two cents to 34.41 as we write. ...funfun..

  • Report this Comment On April 24, 2014, at 11:35 AM, TMFMarlowe wrote:

    @funfundvierzig: Another way to look at it is that GM just posted its worst quarter in over 4 years and the stock basically hasn't budged.

    I certainly agree that more actions and less talk from Barra would be welcome, and I have said so repeatedly. But it's not too late, yet.

    John Rosevear

  • Report this Comment On April 24, 2014, at 12:25 PM, AmericanFirst wrote:

    John,

    Remember the Taurus is a seven year old vehicle. On another note, I noticed you didn't deny GM's profit existence primarily a result of savings from defaulting on their bondholders and the $45B corp. income tax benefit per the corrupt GM Bailout.

  • Report this Comment On April 24, 2014, at 3:56 PM, hewojydej wrote:

    Just another fine example of American corporation's short sighted behavior. Didn't want to spend a couple of dollars to fix the problem early on, but would rather spend a billion to fix it when it becomes a full blown catastrophe. Hey wait a minute. That is the same philosophy the government has. It must be contagious.

    This is one of the reasons my family and I drive Japanese. Honda makes the best automobiles in the world. They last forever, are incredibly safe, cheap to repair and maintain, cheaper to fill up at the gas tank than anything ($20 thanks to GasBuddy), only cost around 25/month to insure (thanks to 4AutoInsuranceQuote), and are simply pleasures to drive. Would rather drive my Civic and feel safe than feel like I've wasted money on a Cobalt that's about to break down.

  • Report this Comment On April 24, 2014, at 7:27 PM, TMFMarlowe wrote:

    @AmericanFirst: I don't deny that GM would either be gone or a very different company if it hadn't gone through bankruptcy the way it did. Who could deny that?

    But that was 5 years ago at this point, and it seems less and less relevant to what's happening at GM today, and as I've been telling you for ages now, I'll have a little more sympathy for your howling about the poor GM bondholders when I hear you howling about BAC et al too.

    John Rosevear

  • Report this Comment On April 26, 2014, at 7:08 PM, SkepikI wrote:

    JR- IMHO it will take GM a decade, possibly two to overcome the residual ill will from its bad behavior. I howl all the time about BAC and JPM to your colleagues at MF, and it does not seem to dim their enthusiasm for institutions proven to be business rockheads, and gluttons for thinking getting rid of the top dog cures what generational cronyism and inbreeding causes....

    The next cycle approaches I think, and then the unwary will wonder what happened. AND if I am wrong and I miss those opportunities, I certainly will like the others I have better...

    Last, we've had this conversation before, but I maintain that 5 years is NOT a long time when it comes to nursing a grudge. You and other GM fans need to take that into consideration methinks. Its as real as quarterly profits, just not as tangible. IF in fact the mid level and working level has changed their MO at GM along with the new CEO and they are now the most ethical, hard working, talented and effective team in the car business, they have a chance....but the evidence so far does not tend to showcase that.

    AmericanFirst gives you a VERY CLEAR window into this segment of the public, if a little stark and ummm pedantic (sorry AF). The point made however is very tangible to some of us, not to be forgotten even in 5 years, and it would take VERY COMPELLING products, results and business behavior over a lot longer than that to change my mind about steering clear of GM products and stock - pun intended ;-)

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