The drums are beating louder. For several weeks, reports have suggested that General Motors' (NYSE: GM) European arm lost huge sums in the fourth quarter. Now, analysts and Bloomberg say GM may be poised to report its lowest quarterly profit since emerging from bankruptcy, all thanks to Europe.
If it plays out as expected, it'll be a rough way to cap a year in which -- at least through the first three quarters -- the General made more money than at any time since 1987.
At least the rest of GM's global empire is likely to be in pretty good shape. But Europe is just one of a few things that need attention – and hopefully, Thursday's earnings report will bring updates on them all.
What to watch for on Thursday
GM is set to report its fourth-quarter and 2011 earnings before the market opens on Thursday morning. Analysts are currently expecting a profit of about $0.41 a share, versus the $0.52 it reported a year ago. That number will be driven by an expected $1.1 billion in profits from GM's powerhouse, North America, but offset by losses from Europe that could exceed $350 million.
That European loss would follow the roughly $300 million that GM lost in the region last quarter, and would more than explain the urgency with which CEO Dan Akerson appears to have attacked the problem. Expect Akerson's update on the European situation to get a lot of media attention during the day on Thursday.
But while Europe looks to be GM's biggest concern at the moment, investors will want to stay focused on other issues as well. High among them: GM's pension situation. GM has previously admitted that it is facing a global pension-fund shortfall that could result in a significant liability by mid-decade, but the extent of that shortfall isn't known. Concerns about that liability have weighed on GM's stock price. CFO Dan Ammann has promised an update with this quarter's earnings report, and that will be worth following closely; a report that alleviates investor concerns might do wonders for the stock price, once the European situation shakes out.
Elsewhere in the world...
As with rival Ford (NYSE: F), the bulk of GM's profits come from North America -- even though, unlike Ford, GM sells more vehicles in China than it does here. But those vehicles tend to be lower-margin products, on average, and GM's profits are split with the local joint-venture partners it is required to have under Chinese law.
But GM's sales in China have remained solid despite a softening of the overall auto market, and analysts expect profits in the region to come in roughly in line with GM's year-ago numbers (around $334 million). GM's operations in South America were likely less successful, as the company has said that it is undertaking restructuring and a product-line overhaul in the region. Profits were down significantly during the first three quarters of 2011, a trend that is likely to continue for several more quarters.
An end to uncertainty would be helpful
At some point, Akerson will reveal his plan for transforming GM's broken European operation into a resilient source of profits. When it comes, it's likely to be drastic -- GM has lost nearly $15 billion in Europe since 1999 -- but just the fact of it might well help the stock price.
I suspect that simple uncertainty on the part of investors -- around Europe, as well as the pension situation -- has a lot to do with why GM's stock trades in the $20s rather than in the $30s. Because really, GM's doing reasonably well: Profits in the U.S. have been strong and improving, the company retains its leadership position in China, and its overall product quality is gradually approaching parity with Toyota and Honda -- a just-released J.D. Power survey ranked GM's Cadillac brand third for dependability, behind Toyota's Lexus brand and Porsche.
GM's product lines here and abroad still have a ways to go, but the company is clearly on track, following a comprehensive plan that, over the next several years, will streamline and globalize GM's product line in the same way that Ford has done in recent years. And hopefully, GM will see the same profit-enhancing results.
But meanwhile, General Motors' stock continues to be weighed down by the uncertainty of Europe and its pension funds -- two legacies of Old GM that haven't yet been brought into line with the strength of the rest of the company. Will Thursday be the day that starts to change? We'll find out.
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