Congratulations to anyone bold enough to hold onto their position in a questionable General Motors Company (GM) through this morning’s earnings announcements. GM stock is up 6% today as of the latest look, rewarding that fortitude.
Though GM fell a little short of revenue expectations, General Motors earnings for the second quarter were better than analysts had been expecting. The company believes the second half of 2015 will be even better than the first half.
And yet, from a different perspective, GM may not have necessarily done all that well last quarter.
While profits per share of GM stock may have been up on a year-over-year basis, the year-ago figures were sandbagged by a very costly ignition switch compensation program … on top of massive recall costs.
To get a firm grip on whether GM’s success last quarter was just a relative victory, or an absolute one, we need to take a closer look at the history of all the numbers.
General Motors Earnings, By the Numbers
The official numbers: On an operating basis, General Motors earned $1.1 billion worth of net income last quarter, or $1.29 per share, versus expectations of only $1.08 per share of GM stock. The carmaker only earned 58 cents (operating) per share in the second quarter of 2014, or net income of $190 million.
Revenue-wise, the most recent quarter’s top line of $38.2 billion missed estimates of $40.4 billion and were weaker than the year-ago sales figure of $39.6 billion.
Granted, the price of GM stock as of yesterday’s close was much lower than it was a year ago, suggesting the market had priced in a worst-case scenario it didn’t quite need to. The true value of GM, though, may still be obscured by meaningless comparisons and the yet-to-be-felt impact of China’s market meltdown.
The Rest of the Story
To be fair, there were plenty of bright spots within the General Motors earnings report.
The critical North American market, for instance, yielded an EBIT profit of $2.8 billion — more than twice the year-ago level — thanks to a spike in truck sales. Income from its joint ventures in China also drove a lightly higher profit contribution of $502 million, compared to only $476 million in the same quarter a year ago.
On the flipside, the bottom line of $1.1 billion could have been even better had it not been for a handful of pretax adjustments. GM booked $720 million in pretax charges due to a sharp devaluation in Venezuela’s currency, in addition to booking charges of $400 million and $75 million to account for restructuring in Thailand and costs related to its ignition-switch recall and victim compensation agreement, respectfully.
Adding all the special items back into the income statement, GM actually produced an EBIT profit of $2.9 billion.
So how, pray tell, is GM doing as a business venture outside of all the unusual charges that obscure the value of GM stock?
From a revenue and gross-profit point of view (the simplest means of measurement that isn’t swayed by one-time charges), General Motors is anemic. The chart tells the tale. Gross profits were up last quarter, to $4.26 billion, which handily topped the Q2-2014 figure. Broadly speaking though, it was just an average quarter gross-profit-wise, and the revenue trend is lackluster.
Bottom Line for GM Stock
Kudos to General Motors for a decent quarter. It was better than expected. In the grand scheme of things, though, the company remains anemic even if it’s squeezing slightly higher margins out of its operations.
That being said, beyond today, the company may be facing more headwinds than it’s letting on to owners of GM stock.
Yes, China was a success for GM last quarter despite the nation’s market meltdown. Look closer at the timing of the implosion, though. The rollover didn’t materialize until the Shanghai Composite Index peaked on June 15. It didn’t become scary until the last couple of days of June, right as GM’s quarter was ending.
The point being, the vast majority of the impact of China’s stock market crash won’t be reflected in the company’s numbers until its current-quarter earnings are released in October.
It also remains to be seen if North American truck sales will remain as unusually brisk as they were last quarter.
In other words, while the General Motors earnings report has proven the company still has staying power, GM stock is hardly a must-have name right now based on factors like earnings growth, prospects, and risk.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
