General Motors is back from the dead--now what? Check out Thursday's earnings to find out
02/14/2012 8:30 am EST
Investors have been surprised to find that just two years after emerging from bankruptcy General Motors has returned to its traditional position as the world’s largest carmaker. In 2011 General Motors sold 9 million cars to take back the title of the title that it lost to Toyota in 2008.
The good news has helped propel GM shares to a 25.8% gain for 2012 through February 10. (That compares to a 6.98% gain for the Standard & Poor’s 500 in 2012 through February 10.)
But now the shiny new car that GM built—with financing from U.S. taxpayers courtesy of the Obama administration—has got to perform. The showroom gloss is gone and investors will want to know how long it will take the new GM to go from zero to 60—and if the engine will blow out halfway down the track.
Mere survival is no longer good enough—especially now that investors have bid up the value of that survival by 26%.
I think we’ll see what this little deuce coup has got not in the company’s report on fourth quarter 2011 earnings, but in GM’s guidance for 2012. For the last quarter of 2011 Wall Street is looking for 42 cents a share but I think GM’s got a good chance to report a 10% surprise at 46 cents (and lay rubber in all four gears). Much of that performance, though, even the surprise, is built into the recent run up in the stock price. (The range of analyst estimates for the fourth quarter has a huge spread from $1.08 down to 24 cents a share.)
The big challenge, however, will come in General Motor’s guidance for 2012. That’s when the company faces its big Jan and Dean moment—“But I'll throw you one better if you've got the nerve/Let's race all the way to Dead Man's Curve." Is GM up to climbing to the top of the global car industry—and staying there—or is this simply a company that will sink back into the pack after staging its impressive return from the dead?
I’ve got a list of questions for the company longer than the Little Old Lady from Pasadena’s drag down Colorado Boulevard. I don’t expect convincing answers to all of them on Thursday but I do think investors will be looking for a plan for the year ahead that starts to whittle down these uncertainties.
I’d divide my questions into two lists—company specific and industry wide.
When it comes to company specific questions, I want to know what GM plans to do to fix some long-standing problems.
How will GM fix its European operations? Europe has been a black hole for GM, sucking up profits that the company made in North America and China long before the company’s bankruptcy. The company had set a goal of EBIT (earnings before interest and taxes) breakeven in Europe for the third quarter of 2011—and then didn’t make it. For the quarter GM’s European operations showed an EBIT loss of $292 million. That was an encouraging improvement from the $559 EBIT loss in the third quarter of 2010. But all this was before the euro debt crisis really started to crush European economic growth. With Europe headed into a recession, it’s not reasonable to think GM can produce a profit in Europe in 2012, but I’m looking for a long-term plan for after the recession.
GM’s bankruptcy let the company take a whack at its labor costs, including healthcare and pensions, but the company still faces big pension liabilities in the years ahead. Lower interest rates and a faltering stock market have reduced the returns the company can reasonably claim to expect over the next few years. Investors will be looking to see how much of a reduction the company makes in its expected rate of return for its pension plans and how much the company will have to contribute to make up for the shortfall.
What’s the picture for margins in 2012? General Motors faced rising commodity and raw materials costs in 2011 and nothing I’ve seen indicates that costs will fall in 2012. At its last analyst day the company said it thought it could use efficiencies to cut costs and raise margins. Investors would like to see that spelled out in more detail.
Is GM developing a high-margin vehicle (trucks, crossovers, and luxury brands) problem? In January 2012 GM saw vehicle sales fall by 28% from December and about 11,000 vehicles short of the 178,896 sold in January 2011. Total sales for passenger cars climbed 3% from January 2011, lead by Chevrolet car sales. Truck sales fell 6% and crossover sales declined by 18%. Buick sales fell by 23% and Cadillac sales dropped by 29%. GM’s undoubted success in making the Chevy brand competitive with cars from Toyota and Korea with models such as the Malibu, Cruze, and Sonic, will be a Pyrrhic victory if sales of vehicles with higher profit margins dip. GM has planned a major effort to expand Cadillac sales in 2012 with production this spring of a new technology-packed CTX luxury sedan. An all-new ATS compact luxury sedan was unveiled in January. The CTX and ATS will bookend the brand’s core CTS models. Investors will be listening hard on the conference call to know how the Cadillac effort is shaping up.
Looming over the conference call, however, is the same industry-wide overcapacity that threatened car companies even before the global financial crisis. To a great degree 2011 was a good year for U.S. car companies such as General Motors and Ford because an earthquake and a tsunami in March disrupted auto production in Japan. Auto production in Japan fell to 7.9 million units in 2011, according to Credit Suisse from 9.1 million units in 2010. North American auto production, which includes production by Japanese and Korean companies in North America, rose to 13.0 million in 2011 from 11.6 million in 2010.
So here’s my global industry question for GM’s conference call: What’s the company’s plan for coping with a glut of global auto manufacturing capacity?
Part of the answer from GM management, I’d guess, will be that GM is a leaner company that can make money at lower levels of production because it has shed capacity by getting rid of brands such as Hummer and Saab. Plant closings by General Motors, Ford, Chrysler, and Toyota reduced North American auto capacity by about 1.5 million vehicles in 2009, for example, to 18 million units. Impressive until you realize that the industry is hoping to see sales rebound in 2012 to 14 million units in 2012.
And North America is only one of the markets where GM faces excess capacity. The European market—that’s the European Union plus Iceland, Norway, and Switzerland—saw unit sales dip to 13.6 million in 2011, a drop of 1.9 million units from 2010. But European production capacity remains at an estimated 20 million units. That puts 2011 sales at 68% of capacity.
Part of the answer from General Motors will be, I expect, China. Total auto sales in China hit 18.5 million in 2011. That was just a 2.5% increase over 2010 sales but more than enough to keep China’s recently won ranking as the world’s largest auto market. And hopes run even higher: J.D. Powers projects that Chinese auto sales could hit 35 million vehicles by 2018.
GM is well positioned to get a big piece of that growth. The company and its joint ventures sold 2.5 million cars in China in 2011, an 8.5% increase over 2010. That was enough to earn GM a seventh consecutive crown as the sales leader among global automakers in China.
The problem is that just about every automaker in the world has targeted China as the big solution for its capacity problems. Which has, in turn, produced a huge overcapacity problem in China. Based on currently announced investment plans, total annual output from China’s 30 major carmakers will hit 31.2 million units by 2015, according to the National Development and Reform Commission.
You do the math. 18.5 million cars sold in 2011. Production capacity of 31.2 million units by 2015. With new investment pushing up that projected capacity every day.
That projection that Chinese auto sales will hit 35 million units by 2018 had better be right—if the auto industry in China is just to break even on supply and demand.
And forget about China soaking up any big part of the global surplus of auto production.
In that context, I’d like to hear GM management talk about shrinking the company’s production some more—from an investor’s point of view the goal is not to sell the most cars but to make the biggest return on investment. The global auto industry isn’t done with restructuring and it would be a big plus, to this investor anyway, if GM acknowledged that its own restructuring job isn’t done.
The global auto industry—and individual automakers--can’t simply grow its way out of this bind. And the solution isn’t putting a company’s foot down harder on the accelerator.
“We both popped the clutch when the light turned green/You should of heard the whine from my screamin' machine/I flew past LaBrea, Schwab's, and Crescent Heights/And all the Jag could see were my six taillights/He passed me at Doheny then I started to swerve/But I pulled her out and there we were/At Dead Man's Curve”—Jan and Dean, “Dead Man’s Curve,” 1964.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of General Motors as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/