When General Motors (NYSE: GM) reports its fourth-quarter and full-year earnings next week, will it be good news for shareholders?
It should be. According to a report in Monday's Wall Street Journal, the General will likely report net income for the full year of about $8 billion, a hefty jump from last year's $4.7 billion and a bit ahead of most analysts' estimates.
Coming on top of last week's jobs report that sent shares soaring over 7% on Friday, a strong fourth-quarter result would be an additional welcome boost for shareholders.
But from the perspective of GM CEO Dan Akerson and his team, $8 billion is just the beginning.
Why "10%" is GM's new magic number
Eight billion dollars in annual profit sounds like a decent number, especially in light of GM's recent history -- it's close to what Ford (NYSE: F) made in 2011 -- but Akerson is unlikely to be celebrating much. GM's CEO raised eyebrows (and sent GM's stock tumbling) when he declared that GM's third-quarter profit, a not-bad-at-all $1.7 billion, wasn't "good enough." Similar remarks this time around wouldn't be much of a surprise.
What's the boss's problem? Margins. Akerson's goal isn't to make GM the largest car company in the world (though it is, at least for the moment), it's to make GM the most profitable of the big automakers. As CFO Dan Amman told the Journal, the company is aiming to raise its margin to around 10% -- in line with the best in the business, at least among major automakers.
Like its profits, GM's current margins aren't shabby, but there's definitely room for improvement. With margins of roughly 6%, the General is probably a little above average among big automakers. But Volkswagen (OTC: VLKAY.PK), which isn't much smaller than GM, manages to get more like 8% -- and Hyundai (OTC: HYMTF.PK) and BMW (OTC: BAMXY.PK) are expected to report margins of about 10% for 2011, tops among the big-league automakers.
For a capital-intensive business like automaking, 10% is huge -- testament to Hyundai's cost controls and the strong pricing power of BMW's brand, respectively. Only Porsche and Ferrari (and soon, perhaps, Tesla Motors [Nasdaq: TSLA], which says it's aiming for margins around 25%) are significantly higher. Margins in or even near the 10% range would put GM's annual profit number well over $10 billion, a number that would do wonders for the General's stock price.
So will GM actually be able to do it?
A lot of room for improvement
There is certainly a lot of room for improvements in GM's global operations, many of which are already in motion, and those improvements will be the keys to improving GM's profitability. GM's ongoing effort to streamline and standardize its global product family will, at least in theory, give it one set of (hopefully) great vehicles to sell in markets around the world. This is (more or less) the approach followed by Toyota (NYSE: TM), which sells cars like the Corolla and Yaris all around the world.
Done right, that effort will cut costs, improve competitiveness, and strengthen GM's competitive position in markets around the world, just as Ford's sweeping "One Ford" plan has done for the Blue Oval. That would be particularly true in markets like Brazil and Europe, where it has been losing ground to companies like Ford and VW, and losing money. Stronger products and lower costs would do wonders for GM's efforts in both regions.
In the near term, GM's profits are likely to improve over the next couple of years as revamped products and improving economic conditions lift the company's sales and margins in the U.S., still far and away the General's most important market. Bringing company-wide margins up to the level sought by Akerson may not happen until mid-decade (if it happens at all) -- but in time, the effort seems likely to do good things for the stock price. Stay tuned.
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