General Motors (NYSE:GM) is set to report its third-quarter earnings on Wednesday. What should we expect?
First and foremost, what we should expect is a sharp drop from the $1.03 a share in profit reported by the General a year ago. Heavy losses overseas are likely to weigh on GM's earnings, say analysts, who estimate that GM will earn about $0.60 a share. (That translates to about $1 billion in profits.)
GM's profits have been trending in the wrong direction for several quarters now -- two years ago, still-recovering GM managed to earn $2 billion, or $1.20 a share. What's happening?
A lot of progress, but much still to do
In many ways, GM has come a long way in the last two years. Several much-improved new products have been introduced, and many more are on the way. Efforts are under way to streamline GM's global product offerings, similar to what Ford (NYSE:F) has done so successfully. The company's upper-management turmoil has settled down, and CEO Dan Akerson and his team have grown into their roles. Bureaucracy has been reduced, and the company's cumbersome product-development process has been significantly streamlined.
There's more: Good work has been done to reduce GM's worrisome pension liability. The company continues to be the market leader in China (at least for the moment), and to expand in other key emerging markets. A long-overdue systems overhaul is underway. An important plan to revitalize the Cadillac brand has taken a big step forward.
But some major problems remain, ones that will hurt GM's earnings for awhile. Chief among them: Europe.
Europe is a disaster
A protracted economic slump in the region has dropped new-car sales to a near-two-decade low, with little hope of a meaningful recovery any time soon. GM lost $361 million in the region in the second quarter and is likely to post heavy losses for at least a few more quarters. Morgan Stanley analyst Adam Jonas expects GM Europe's losses to exceed $500 million this time around.
Ford last week announced a dramatic overhaul of its own money-losing European operation, with three plants set to close and several new-to-Europe products on the way. Despite nearly a year of talk about fixing its European subsidiary, German automaker Opel, and ongoing negotiations with Opel's unions, little in the way of action has been announced -- and any action that would make a difference, like factory closings, could take several years to implement.
GM did announce an alliance with money-losing French automaker PSA Peugeot Citroen (OTC: PEUGY) earlier this year. The plan is for Peugeot and Opel to jointly purchase parts, hopefully saving as much as $2 billion a year. The plan appeared to move forward last week with news that the two would jointly develop and produce several vehicles on four shared platforms -- but again, real-world savings are still years away.
It's frustrating for GM shareholders to watch Ford take action while the General appears to dither. However, it's possible that a more dramatic plan is quietly in the works -- for instance, to put Opel and Peugeot's carmaking operations into a new joint-venture in which GM would take a minority interest, removing Opel from GM's balance sheet. That could be a smart solution -- but whether it will happen remains to be seen.
What to look for on Wednesday
Obviously, any news on GM's plans for Europe will be important. Beyond that, keep an eye on details on the company's margins in North America, where incentives have remained higher than most competitors. Last quarter, Akerson expressed optimism that GM's South American operation was on an upswing, despite the fact that it essentially broke even. Look for signs of progress on that front.
What else? Any further progress on GM's pension liability will be welcome -- while CFO Dan Ammann has resolved concerns around GM's U.S. plan for salaried workers, its much larger hourly workers' plan needs similar attention.
But Europe is GM's biggest worry right now. I suspect Akerson will have a lot to say on that front on Wednesday.