Full-size trucks and SUVs helped boost operating profits in the first quarter. Source: General Motors.
General Motors' (GM +0.50%), America's largest automotive manufacturer, reported on Thursday its best first quarter since it emerged from bankruptcy in 2009. Net profits soared compared to last year, although that's a flawed comparison thanks to the $1.3 billion in recall costs during last year's first quarter. As expected, the surge in SUV and full-size truck sales boosted GM's operating profit by $500 million, but ultimately, the market sent shares of General Motors 3.6% lower Thursday during late-afternoon trading.
So, with those positive factors in mind, what went wrong with General Motors' first-quarter 2015?
Brief recap
Let's quickly look at some overall figures before digging into the issues with GM's first quarter.
Revenue checked in at $35.7 billion, which was a 4.5% decline from last year's first quarter. GM's EBIT (earnings before interest and taxes)-adjusted earnings checked in at $2.1 billion compared to last year's recall-affected $0.5 billion adjusted earnings. That brings GM's first-quarter earnings per share to $0.86, which was below analyst estimates of $0.97.
With those numbers out of the way, let's start pointing fingers and placing blame, shall we?
Starting from the top
Looking at what sent revenue trending the wrong way in the first quarter, the culprits are clear: Brazil and FX (foreign exchange). In terms of overall sales, there was a 77,000-unit decrease in wholesale vehicles, mostly due to declines in Russia and Brazil. General Motors South America remains challenging as a region, but that's especially true in Brazil, where the industry is down a staggering 17% compared to last year's first quarter.
General Motors actually increased its market share in Brazil in the first quarter by 40 basis points compared to last year to a total 16.7%, but a slightly bigger piece of a hugely shrinking pie doesn't make the largest Detroit automaker a winner this time.
Even with Brazil's decline in wholesale and declines elsewhere, like Russia, FX was the primary driver in GM's revenue decline. When you sell as many products globally as GM does, those sales translate into fewer dollars as the dollar continues to strengthen against many global currencies. The main culprits are the Brazilian real, the euro, the British pound, and the Venezuelan bolivar.
Switching gears to understand what went wrong with GM's operating profits, let's look at Russia.
Packing up and leaving
As Russia's economy continues to implode, GM has had enough and has decided to pull its Opel brand from Russia entirely and cut back production of its mainstream Chevrolet brand there. That decision came with a $0.4 billion pre-tax charge to GM's operating income. But Russia wasn't the only negative impact on GM's operating income; the automaker incurred another $0.2 billion special-item charge to better fund its Ignition Switch Compensation Program, which handles claims stemming from the defect that resulted in massive vehicle recalls.
All in all, GM's operating income in the first quarter checked in at $0.8 billion -- however, if you're a glass-half-full kind of person, that's better than last year's loss of $0.5 billion.
Last but not least, GM ended the first quarter with $22.1 billion cash on hand, which was a decline from $25.2 billion at the end of last year. Part of that decline was due to GM paying out an additional weekly payment to suppliers, compared to last year.
Glass half full
I'm sure that, as a current shareholder, or potential shareholder, it's frustrating to see one-time charges, special items, and restructuring costs continue to drag many quarters below expectations, but that's a part of business in an industry that spans the globe.
The good news, again if you're a glass-half-full kind of person, is that CEO Mary Barra expects to continue driving operating margins in North America -- where GM generates the majority of its profits -- to 10% over the next several years.
While we wait for that to happen, for Europe to finally be profitable in 2016, for Russia to stop imploding, and for currency exchanges to be less crippling, GM will at least be spending $5 billion to boost earnings per share through share buybacks, to be completed by the end of 2016, and will pay you a 3.3% dividend yield while you wait for better days.
