Investing in General Motors (GM 3.28%), like anything else, has its pros and cons. On the pro side, you see the potential to be No.1 globally in vehicle sales, nipping at the heels of Toyota. It's positioned well in the U.S. pick-up truck segment, an immensely profitable market, battling Detroit rival Ford (NYSE: F) for important share gains. It's also claimed the top spot in China, barely fending off Volkswagen's surge up the ranks.
The cons though, highlight a company that took a brand image hit due to government bailouts. Its profits and margins have left more to be desired since 2009; however, both are in undeniably better shape today. I think there is one big reason GM won't make its turnaround in 2013, and it was also evident in Thursday's earnings release. Let's see how the numbers turned out, what it means going forward, and why 2013 isn't the turnaround year for GM.
By the numbers
GM's earnings report is a mixed bag of results, with an increase in operating profit, but also a larger loss in Europe. GM posted a net income of $1.19 billion, $0.54 a share. That number beats the average analyst estimates of $0.51 per share, but that isn't the full story. Here's why.
During the fourth quarter, GM claimed a one-time non cash gain of $34.9 billion. What this really means is that GM expects to continue being profitable, and no longer needs the tax allowance that was in place to help protect the company while it was losing a ton of money. This claim was partially offset by special items that include a $26.2 billion goodwill charge from its North American operations post-bankruptcy. If you exclude those special items, and others, it brings down the net income from $0.54 a share, to $0.48 a share. Let's look at what's holding profits back.
What's killing the profits?
Similar to Ford, Europe heavily weighed down the profits with 4Q operating losses, larger than expected at $699 million. That ugly number brings the full year to a $1.80 billion loss, which dwarfs the $747 million in 2011. Both companies believe Europe losses in 2013 will look nearly the same, not something any investor wants to hear. The Europe situation is bad, but the reason I don't think 2013 is the turnaround year is found with the North American operating profit, which dropped 7% in the 4Q. For the entire year, it fell 3%. With transaction prices up overall significantly, shouldn't profit follow upwards instead of dropping? Dan Ammann, GM's CFO, said that a busy vehicle-launch schedule increased it's fourth-quarter costs higher. To me, that spells trouble for GM in 2013. Here's why.
Inventory and portfolio refresh
I highlighted what Alan Mulally, Ford's CEO, felt its biggest challenge is. He believed it would be smooth launches with new vehicle models and inventories associated with it. It's a fine line between having too little inventory, and too much. If you have too little, you run out of product early, and suffer drastic sales declines. For an example, look at Ford's January Lincoln MKZ sales; it's ugly. If you have too much inventory, you're forced to place heavy incentives to move excess product, especially when you have new model's coming in.
Throughout the world, GM is planning to introduce 25 new or remodeled vehicles in 2013. GM said it expects profits to rise only modestly, due to the costs that will be incurred with these launches. The launches include new designs of the Silverado, Sierra, and the Impala. By summer, the new Corvette will hit the streets, followed by the Encore crossover. The portfolio refresh also extends into 2014, with the Suburban, Tahoe, Yukon, and Escalade expected in the first half of the year.
Now, let me say that I believe this entire portfolio refresh is exactly what the doctor ordered. GM has previously said its market share loss is due to having the oldest vehicle portfolio in the industry. The problem is the costs that go hand in hand with new designs. That list above is a large number of vehicles, and a lot of inventories to keep in check. It's also challenging to time changeovers perfectly. These next six quarters of vehicle launches will likely determine the next few years of success for GM investors. Even if rollouts are completed almost flawlessly, with zero recalls and on schedule, and inventories are held in check, I still believe the costs incurred will be too much to see a turnaround in the profits in 2013. However, it might be enough for investors' to see revenue rise with the new vehicles, hoping that efficiency will follow.
Bottom line
If I was given the chance, as an investor, to have Ford or GM's executive management, I would choose Ford's, hands down. Sorry GM fans; I believe Mulally and friends have proven time and time again that they make quick, great decisions. That said, look at recent launches of the Fusion and Escape, which totaled six recalls combined, and the MKZ, which was delayed and ran out of prior year models to sell. I believe GM will have difficulties managing a portfolio refresh that is much larger and more difficult. I don't think GM's management will be able to pull it off without incurring a lot of cost that will weigh down 2013 earnings.
Make no mistake -- the next year and a half will be crucial for GM to have the vehicles it needs to compete for the No. 1 global sales spot. If they pull it off, it could very well reward those who are willing to risk the investment. For now, I'm skeptical, but I'll be watching closely.
