General Motors Company Reports a Profit Despite Huge Recall Costs

A $1.3 billion recall charge was expected to put GM in the red, but it managed a profit on strong new products.

Apr 24, 2014 at 10:32AM

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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.

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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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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. 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.

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