The largest U.S. automaker General Motors (GM, Financial) released its second quarter 2014 earnings on Thursday, July 24. The company’s top line and bottom line missed Thomson Reuters’ estimates, disappointing investors. In fact General Motor’s earnings declined year on year. As a fallout of the dismal numbers, there were massive trade volume that made company’s share price plunge by 2.1% to $34.99. Let’s take a closer look at what made the numbers go down.
A Snapshot of the Quarter
The American automaker posted a mild revenue growth of 1.3% to $39.60 billion in the second quarter, but was below analyst estimates. However, earnings per share plummeted drastically to $0.58 compared with $0.84 reported a year earlier. Analysts, the other hand, had estimated revenue to hover around $40.63 billion and earnings per share to be around $0.95 a share. However, earnings registered were far below expectations, and this automatically got reflected in the company’s share price.
In regards to the ignition switch issue, company CEO Mary Bara says that the company’s been resilient in taking such huge recalls and associated costs since the first quarter of this year. She agrees that the same difficulties were faced in the second quarter, but the company’s strong operating performance lessened its effect. General Motors sold 2.5 million cars and trucks in the second quarter, which is the automakers best second quarter sales volume since 2005. Sales in the company’s two biggest and most lucrative market – North American and China – rose 6% and 8% respectively. But this was substantially belittled by poor sales in Russia and Venezuela. General Motor is thinking of closing operation in this region.
A number of research firms have changed their recommendation on the company’s stock. Experts in Credit Agricole lowered their recommendation from a “buy” to an “outperform” rating. Deutsche Bank analysts have also downgraded the share from “buy” to “hold”. However, Citigroup keeps its recommendation unchanged at “buy”.
What Caused the Poor Results?
Several recalls during the quarter and the anticipated cost of $400 million as compensation to those who got killed or injured due to the ignition switch defect pulled down profit numbers. The compensation figure could increase to $600 million. It’s been quite a difficult year for the Detroit automaker which has made as many as 60 recalls for 29 million cars year to date. The cost of fixing the faulty ignition switches and remunerating the victims was a big blow to the company having a greater-than-expected bearing on its earnings.
The company’s second quarter profits fell to $200 million which translates to $0.11 a share because of massive one-time unusual charges that includes the recall expense. Though the company had released new models, its effect was blunted by the mass in which recalls were conducted in the period. In contrast, rival Detroit auto giant Ford (F, Financial), which recently announced its quarter results, registered a 6% hike in net income to $1.3 billion. However, both the automakers were affected by the weakness in Latin America and Russia. Europe remains a week spot where General Motors recorded loss figures once again, while Ford registered its first profit in the past three years.
Departing Thoughts
The company is hopeful about the second half of the year. General Motors remains committed on delivering flawless vehicles, and also has plans to introduce new models. This should boost the sales volume of the company. The carmaker stays confident about its future long term prospective.
