After Ford's (F 0.08%) solid third-quarter report last week the pressure was on crosstown rival General Motors (GM -0.04%) to deliver strong results as well -- and it did. General Motors' revenue increased 4% to $39 billion and it earned $2.6 billion in the third quarter on an adjusted pre-tax basis. Its pre-tax earnings per share checked in at $0.96, topping Wall Street estimates of $0.93 per share. Global deliveries and market share increased, as well as adjusted automotive free cash flow -- showing strength in General Motors' overall business.
While the overall numbers are solid, there are two key factors investors should be excited about: North America margins and narrowed losses in Europe.
Margin trending higher
Ford has essentially set the benchmark in North America for margins. The folks at the Blue Oval have cut capacity, consolidated platforms, and improved operating efficiency enough to consistently produce margins above 10%. General Motors is behind Ford in those results, but it's improving fast.
Graph by author. Information from General Motors' third-quarter report.
It's General Motors' goal to have its North America margins consistently check in at 10% by mid-decade. Further, General Motors is aiming for its 10% margins to be achievable even during a mid-auto cycle, which would entail vehicle sales at a SAAR, or seasonally adjusted annual rate, of about 15 million.
Indeed, 10% margins during a historically mediocre sales pace is a great goal for General Motors and its investors; however, what's even better is that its operations in North America can break even at a SAAR of between 10.5 million and 11 million units. The following SAAR graph shows that such a slow pace happens very rarely:
Graph by author. Information from Automotive News DataCenter.
This means that currently General Motors, as well as Ford, won't be posting insane amounts of losses like we've seen in the past. That's a comforting thought for cautious investors who witnessed Ford lose over $30 billion between 2006 and 2008 and also watched General Motors file for bankruptcy in 2009. General Motors is likely to see ups and downs in its margins sequentially, but investors should still expect improvements in year-over-year comparisons.
Narrowed European losses
Ford and General Motors have posted billions in losses over the last couple years in Europe. It's been the single largest drag on both automakers' stock prices, and remains one of the fastest ways for the two companies to quickly improve their earnings per share -- simply by breaking even in the region.
In General Motors' third quarter it posted a loss in Europe of $214 million, a large improvement over its $487 million loss last year.
Graph by author. Information from General Motors' third-quarter report.
In fact, losses have been much better than analysts expected: Through the first three quarters of 2013, General Motors' losses in Europe barely exceeded its losses from last year's third quarter alone. General Motors could see some additional expenses from its restructuring in Europe start as early as next quarter, but the overall trend is definitely improving, and slightly faster than expected.
Bottom line
General Motors has made solid strides this year in improving its vehicle quality and plans to refresh, redesign, or replace 90% of its vehicles by 2016 -- a move desperately needed to shore up the industry's oldest vehicle portfolio. As it continues to improve its balance sheet, look for other credit rating agencies to follow Moody's recent trend and bump General Motors up to investment grade. Make no mistake, General Motors still has a lot of work to do, especially in repairing its damaged brand image; but, as it turns its organization around, it represents a compelling investment while auto sales continue to rebound.
