General Motors' Shares Rise Despite Recalls Devouring Q1 Profits

Despite massive recalls costing General Motors Company $1.3 billion in pretax profit, shares are rising in early trading.

Apr 24, 2014 at 5:45PM

Gmrenaissancecenter
General Motors' Headquarters in Detroit. Source: General Motors

General Motors (NYSE:GM) was up 0.6% in late-morning trading, despite its massive recall debacle eating a vast majority of the automaker's first-quarter profit. This obviously came as no surprise, and investors had been heading to the door since the recall investigations began in January. Those walkouts sent the troubled automaker's stock price down by as much as 20% this year before shares rebounded slightly in mid-April. Here's a breakdown of GM's first-quarter figures and how its underlying business performed.

By the numbers
General Motors recalled roughly 7 million vehicles during the first quarter. The recall of 2.6 million vehicles due to faulty ignition switches that have been linked to at least 13 deaths represented a pretax charge of $0.7 billion. About 4.5 million other vehicles were recalled for a mix of issues and represented another charge of $0.6 billion. These charges, along with another $0.4 billion charge for special items, had a clear impact on quarterly results.

Starting from the top, General Motors' net revenue in the first quarter increased to $37.4 billion from $36.9 billion in last year's corresponding three-month period. The automaker's earnings before interest and tax, or EBIT, checked in at $0.5 billion, which included the recall-associated expense of $1.3 billion and $0.3 billion in restructuring costs. GM's EBIT of $0.5 billion was down significantly from last year's first-quarter result of $1.8 billion. Net income attributable to common stockholders was $0.1 billion, or $0.06 per share, compared to last year's result of $0.9 billion, or $0.58 per share. 

To better understand how General Motors' underlying business is performing compared to last year, we can add back in the charges and special items and compare the results.

All things excluded
To be fair, we'll take last year's first-quarter result of $0.58 per share and return special item expenses worth $0.09, for a total of $0.67 per share. This year we need to take the $0.06 per share result and add back in $0.23 for special items and $0.48 for recall charges, a total of $0.77 per share. All things excluded, General Motors' earnings could have been roughly 15% higher in the first quarter compared to last year.

GM's improving underlying business is likely what has the stock up in morning trading. Investors hope GM will take care of safety issues and customers, and repair its brand image to accompany its improving business.

Images

GM's full-size trucks are driving transaction prices higher. Source: General Motors.

Foolish takeaway
Despite GM's massive recall debacle, the company had a couple of highlights on paper. Thanks to the launch of all-new full-size trucks the automaker was able to reach record average transaction prices in North America. GM also paid out its first common stock dividend since emerging from bankruptcy and reached record sales in the world's largest automotive market, China.

The damage done to GM's profit in the first quarter due to recalls won't be the end of the tragic situation that has claimed lives. The effect on the automaker's brand image could hinder sales for some time, and it will be nearly impossible for investors to gauge the true cost of its recalls this quarter.

If you're an investor looking to capitalize on the rebounding automotive industry, GM is a solid option with an improving business. But before buying in, you need to be sure the automaker and its management is truly putting customer safety ahead of everything else. If not, quarters like this will be a recurring theme. 

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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.

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