The top U.S. automaker General Motors (GM, Financial) reported its first quarter 2014 earnings recently. The automaker saw a severe plunge of 86% in its profit, but to one’s surprise company shares went up in pre-market trade. This shows that investors have high hopes tied to the automaker. Global recalls and huge restructuring costs had a terrible bearing on General Motor’s results, but these were partially offset by growth in the American and Chinese markets.
Numbers at a Glance
General Motors’ top line saw a growth of 1% over last period to $37.4 billion, but was unable to beat Wall Street estimates. The carmaker delivered 2.42 million vehicles, up 2% from a year ago quarter when it recorded sales of 2.36 million units. But the company’s profits nosedived by a whopping 86% to $125 billion during the period compared with $865 million in the year ago quarter. Earnings per share of 6 cents were better than consensus estimate of 4 cents. This precisely made the company’s share price go in the green up 3.3% to $35.52.
Let’s reason out the lower profit figures.
The Recall Woes
This quarter General Motors had to take in massive recalls which had a deep impact on the company results. The core operating result of the company was quite strong but it was more than compensated by the cost of recall of 3.7 million cars with technical snags in the ignition switch and steering.
The past four months have seen several critical developments which includes the Chevy Cobalt and Pontiac G5s recalls. The recall charge was as huge as $1.3 billion, which translates to 48 cents a share. Now that’s reasonably a good figure. Quite obvious, this pulled the earnings before interest and tax (EBIT) down to $500 million from $1.8 billion last year same period. Other than this, the auto major also had to account onetime charge of $419 million related to currency fluctuation in Venezuela.
But while recalls plagued the results, core operations partially helped redress the overall quarter outcome.
Counting on Core Operations
The Detroit carmaker’s core operations stood very strong. The company’s focusing on providing highest level of safety, best specifications, and quality. This is actually paying off the auto giant. CEO Marry Barra said that the company received encouraging response from its customers for the new launches it made during the quarter. This was reflected in the revenue.
North American operations somewhat helped in mellowing down the effect of recall charges. GM’s CFO Chuck Stevens said that the overall quarter results would have been quite good, but recall charges played the main culprit in bringing down the numbers. When asked if the company has more of such costs to write off, Stevens cleverly answered “It’s too early to predict.”
But Europe continued eroding profit in this quarter by recording a pretax loss of $284 million, considerably higher than last year’s loss of $152 million. However, GM is confident about its prospects in the continent and expects to break even by 2015. Another oversea operation added up to the losses. South American operations dealt a blow of $156 million in losses for the period, compared with last year’s loss of $38 million. The international division, including China, registered a pretax profit of $252 million, lower than last year’s $472 million.
Looking Forward
This is the second quarter post Marry Barra appointment as the CEO of the company. She is the first lady CEO taking charge as the leader, and there are huge expectations from her that she would help go GM to the next level particularly after the 2007 financial crises that it suffered.
This quarter was the worst for GM in the last four years as the recalls that damaged results. But if we consider the fact that these are special or non-recurring issues, the upcoming quarter should brighten investors mood. I believe long term investors can stay put.
