SUVs and pickups powered GM's North American operating profits. Image source: General Motors.
It was clear after General Motors (GM +1.51%) announced its first-quarter EBIT-adjusted earnings of $0.86 per share, which missed analyst estimates of $0.97 per share, that investors were disappointed. Shares promptly traded 3.3% lower Thursday. FX (foreign exchange) largely drove top-line revenues down 4.5% to $35.7 billion, compared to last year, and GM had to wipe out $0.6 billion in operating profits because of its decision to pull operations out of Russia and increase funding for its ignition switch compensation program.
It was a bit rough but, as usual, there remains a silver lining for General Motors investors. Here's a look at some of the positives during GM's first quarter -- because there were some real bright spots.
Chart source: General Motors' first-quarter presentation.
Show me the moneymaker!
It won't take you long looking at the graph above to see the bright spot is clearly GM North America, or GMNA, which of course is typical. Still, GMNA checked in with an EBIT-adjusted for the record books, and it was the best first-quarter performance GM has generated since emerging from bankruptcy in 2009.
One of the driving forces behind the strong GMNA performance was sales of SUVs and pickup trucks. Together, sales in those segments boosted GM's operating profit by $500 million in its North American region.
Another reason for GM's improved profitability -- it was the seventh consecutive quarter of GMNA year-over-year margin improvement based on core performance, as noted by GM -- can be seen in the graph below.
Chart source: General Motors' first-quarter presentation.
As you can see, incentives have consistently declined for nearly two years. Also, average transaction prices increased roughly $1,900 per unit compared to last year's first quarter. When incentives lower and ATPs rise, it's a much more profitable scenario. Now, it's true GM's market share took a dip, despite each sale being more valuable, but that's expected ahead of important and/or high-volume launches, such as the upcoming Malibu, Cruze, and CT6.
Furthermore, the first quarter would have been even better if it weren't for a roughly $600 million headwind in carryover pricing. Basically, rather than flooding the market with auctioned vehicles from GM's massive recall last year, the company held back models, which lowered in value as they aged.
Another bright spot was GM International Operations, or GMIO, which was the company's second most profitable region in the first quarter. GMIO's EBIT-adjusted performance checked in roughly $100 million higher, compared to last year, with key drivers being mix and price. GMIO's performance is largely driven by China, where GM continues to excel. GM's market share in China was 15.1% with a strong 9% increase in wholesale units. Investors should expect GM's positive results to improve further throughout the year with the expansion of its luxury Cadillac brand and a reduction in launch/change-over costs.
Overlooked?
One very positive factor that many might have overlooked was the improvement in GM Financial. It's been a long and complicated story for GM's financial division, especially as the automaker was forced to cut ties during its recent bankruptcy. Because of that, it's easy to forget how valuable GMF (known before as Ally Financial, and once GMAC) was.
In 2003, GMAC generated $2.8 billion for Old GM's bottom line. That's a ton of cash, and it even dwarfs rival Ford's very valuable Ford Credit, which brought in $1.9 billion in pre-tax profits last year.
Fast-forward to today and GM has its sights set on reinvigorating its finance division. During the first quarter the percentage of retail sales using GMF for financing increased to 28.8%, compared to 18.9% during last year's first quarter. GMF is already GM's third most profitable entity/region, and that's expected to improve rapidly, which will boost bottom-line earnings quickly.
Chart source: GM's Returning Value to Shareholders presentation.
Sure, GM's first quarter definitely disappointed investors and analysts after a handful of restructuring and special item charges, and its stock price quickly reflected that slight disappointment. However, three key aspects to GM's investment thesis -- GMNA, China, and GMF -- are clearly moving in the right direction, and once those one-time charges disappear from quarterly reports, expect some home run results.
