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Ben Klayman, Deepa Seetharaman09 Nov 2011 20:11
General Motors (GM) posted a third-quarter profit that fell 15% after a loss in Europe and disappointed investors with a forecast that closed the door on any improvement in the current quarter.
GM vowed to slash costs to shore up margins in a sputtering economy but its fourth-quarter outlook disappointed investors and sent shares tumbling as much as 10% on Wednesday.
Chief executive Dan Akerson said the top US automaker was not performing well enough, almost a year after a record IPO that capped the automaker’s return from a US government bailout and bankruptcy.
“GM delivered a solid quarter ... but solid isn’t good enough, even in a tough global economy,” he said.
“We know that there’s more work left to be done,” Akerson added.
“We need to do a better job in Europe and South America.
GM has cut about 4% of its hourly and salaried jobs in Brazil during the current quarter and more cuts will be made, he said, adding that results in Latin America could be weaker in the fourth quarter.
‘Cost and complexity’
Chief financial officer Dan Ammann said GM needed to eliminate “cost and complexity” from its operations, suggesting the kind of campaign Ford Motor has run under chief executive Alan Mulally for nearly five years. That One Ford campaign has merged vehicle platforms and development efforts globally, cutting costs and allowing Ford to rely on more common suppliers.
Ford, GM’s closest rival, last month posted third-quarter net earnings that were nearly as high as GM’s, on revenue that was 10% lower than GM’s sales.
The contrast is even more striking because Ford, the only US automaker to have avoided bankruptcy, ended the quarter with almost $13-billion in debt, excluding its finance arm.
Mirko Mikelic, senior portfolio manager with Fifth Third Asset Management, said GM is still working to cut costs by building cars and trucks on fewer platforms. GM said in August it planned to cut the number of vehicle platforms by more than half by 2018.
“They’re trying to redefine themselves,” said Mikelic, whose firm owns shares in GM and Ford. “They got a tremendous lifeline from the US government, but obviously that’s not going to happen overnight.”
GM, which boasts that its taxpayer-funded restructuring left it with a “fortress balance sheet”, ended the third quarter with less than $3-billion in long-term debt.
GM’s third-quarter profit in Asia fell 29% as growth in China slowed and results in South America swung to a loss of $44-million from a gain of $163-million last year as its market share shrank due to an aging lineup of vehicles.
“China is a good story if it holds,” Akerson said, pointing out GM’s sales were outstripping the overall industry growth there by about two-and-a-half times.
GM has the largest market share in China and sold the IPO partly on the company’s strength in China, raising concerns for investors if the largest global vehicle market slows.
“We’re definitely worried about this situation in South America, the slowdown in China,” said Citi analyst Itay Michaeli, who has a buy rating on GM’s shares.
“The big story today is going to be what looks like a pretty disappointing fourth-quarter outlook,” he added, saying he had been expecting an improved performance in the current quarter.
JP Morgan analyst Himanshu Patel said GM’s forecast implies fourth-quarter earnings in the low 30-cents-a-share range, far below the 86 cents analysts were expecting.
GM’s net income in the third quarter fell to $1.7-billion, or $1.03 a share, compared with $2-billion or $1.20 a share in the year-earlier period. Analysts had expected 96 cents a share, according to Thomson Reuters I/B/E/S.
Revenue rose to $36.7-billion from $34.1-billion last year. That was in line with analysts’ expectations.
‘Symbolic’ of economic uncertainty
Jefferies analyst Peter Nesvold said GM’s performance and outlook mirrored the increasing uncertainty for economic growth outside North America.
“To some degree, this feels a little symbolic with what we’re seeing globally,” said Nesvold, who has a “hold” rating on the stock.
Akerson said GM needed to improve profit margins, which were 6% in the third quarter, down from 6.7% last year.
GM emerged from bankruptcy in 2009 after a $52-billion taxpayer-funded bailout. The US treasury owns 32% of GM’s common shares, and how it unwinds that stakes remains an unanswered question.
As GM’s share price has slipped well below last fall’s $33 initial public offering price, treasury officials have maintained they will not rush to sell the government’s remaining stake.
Coming out of bankruptcy, Akerson and other executives said the company stripped out enough costs to make the business recession proof so it could thrive even in a recessionary auto market.
On Wednesday, GM said it expects fourth-quarter adjusted earnings before interest and taxes to be similar to the same quarter last year.
It backed away from its full-year target for Europe, saying it no longer expected to break even in Europe before restructuring costs due to deteriorating conditions there. Akerson described Europe’s economy as a “morass”.
‘Significant’ challenges to address
On Monday, GM announced it would change its top executives in Europe.
“We obviously have significant macroeconomic challenges to address,” Ammann told reporters. “We’re not relying on the big pickup in volume in the industry to bail us out if you like and we’re very much focused on getting the break even a point down further so we can get to a point where we’re sustainably profitable.”
GM also said the underfunded status on its US pensions stood at $8.7-billion at the end of September, down from $10.8-billion at the end of June. However, that was according to the valuation set at the end of 2010 and will be revalued at the end of this year.
GM said it would record a $800-million noncash accounting gain in the fourth quarter as a result of taking retiree healthcare liabilities of C$3-billion off its balance sheet. The quarter also will include the payment associated with the new four-year labor deal with the United Auto Workers union.
Shares of GM were down 8.2% at $22.98 at midday on Wednesday on the New York Stock Exchange, off an earlier low at $22.52. Its shares are down 42% from the 12-month high of $39.47 reached in January.—Reuters
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