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Will General Motors Be Able To Stage A Comeback?

August 27, 2014 | About:
Suravi Thacker

Suravi Thacker

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According to AutoData Corp., the auto sales in the U.S. jumped 1.2% to 1.4 million in the month of June. Also, the annualized selling rate rose to 16.98 million. This means that people are willing to spend on automobiles as the demand is on the rise. This was reflected in the sales increase for companies such as Toyota Motor Corp. (TM) and General Motors (GM). However, Ford (F) witnessed a decline of 6% in sales for the month of June. This was mainly because it has reduced its sales to fleet buyers since it is planning to launch new aluminium-bodied F series pickups.

Although General Motors’ sales have been rising, the costs related to its recalls have been a major cause of concern. Indeed, its second-quarter results were also affected. Since the numbers were not so impressive, it led to a decline in share price.

The recall story

Revenue inched up by 1.3% to $39.6 billion over last year’s quarter. However, revenue from U.S surged 7% during the quarter and that of China rose 8%. Also, General Motors’ Opel division witnessed a 3% jump in sales. The top line was driven by higher demand for SUVs and pickup trucks. The SUVs are priced higher. Hence, average transaction size climbed $3,000 per vehicle, over the prior year’s quarter. One of the bright spots during the quarter was China, where sales jumped 8%.

Moreover, sales in Europe rose 6.5% owing to higher demand for Opel and Vauxhall brands. This led to a higher market share of the retailer, in the European region. Although the company is facing a lot of problems in the region, its efforts are expected to become fruitful in the future.

However, the worst performer was the South American region, which registered a drop of 26% in sales. This was mainly due to slowdown in Brazil, one of the largest auto markets. Also, political challenges in Venezuela and import restrictions in Argentina played a vital role.

Delving deeper

As we move down to the bottom line, the picture gets uglier. The automaker’s adjusted earnings plunged to $0.58 per share, falling short of the analysts’ expectations by a penny. On the other hand, rival Ford reported a 6% rise in its bottom line, clocking in at $1.3 billion, all thanks to its restructuring and cost reduction efforts. However, its revenue dropped slightly to $37.4 billion, mainly because of reduction in selling since it is planning to launch new F-series pickup trucks with aluminium bodies.

General Motors could have reported a better quarter if it did not have to recall 7 million vehicles for faulty ignition switches which have led to many accidents and deaths. This led to higher costs for the company, resulting in a sharp decline in its bottom line.

However, both the retailers are dependent on their high-priced SUVs and large pickups for their revenue and face stiff competition in the passenger car segment from cars such as Civic, Sonata, Altima and Camry.

Summary

General Motors’ Cadillac Escalade, GMC's Yukon and the Buick brand have been some of the most successful SUVs and are resonating well with customers. However, weakness in Europe and huge costs related to recall have been quite taxing on the company. This has enabled Ford to outpace the auto giant. Moreover, these costs are expected to continue to hamper General Motors’ bottom line in the near future. Hence, one should stay away from this auto retailer for now.


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