GM posts higher than expected Q2 earnings
General Motors Co. on Thursday reported stronger than expected second-quarter earnings of $1.1 billion, with profit boosts coming from North America and China, a region that had been under doubt given slowing sales growth and stock market woes.
Investors and analysts have increasingly been concerned over GM’s exposure in China — its largest sales market — amid a market of falling prices and lower-than-expected sales growth. Many analysts had expected the automaker would revise downward its earnings forecast for China, but GM Chief Financial Officer Chuck Stevens said GM is sticking with its China plans.
“We’re confident that we’ll be able to sustain the performance we’ve seen in the first half of the year through the balance of the year,” he told reporters at GM headquarters.
The automaker, driven by truck and SUV sales and growing average sales prices, set a record for its North American adjusted earnings and profit margin for any quarter since emerging from bankruptcy as a new company in 2009. GM earned 67 cents a share. When factoring in special items totaling $1.1 billion or 62 cents a share, its earnings per share rose to $1.29, well-above analysts’ calls for $1.08 a share.
The automaker earned a slim $190 million in the 2014 second quarter, or 11 cents a share. Its net income a year ago was significantly impacted by recall costs.
GM’s earnings before interest and taxes for the first half of 2015 totaled nearly $5 billion and GM CEO Mary Barra in a call with analysts said GM expects that figure will be higher in the second half of the year. She also said GM is confident it can achieve its 2016 targets, which include returning to profitability in Europe, reaching 10 percent net income margins in North America and maintaining 9-10 margins in China.
“We think our overall results demonstrate the very strong earnings potential of this company,” she said. “And we believe when you look what we’ve been able to accomplish in the first half of this year, it lays the foundation for the commitments we’ve made for 2016 that we’re very focused on executing and providing a proof point that we’re doing what we say we’re going to do.”
Some analysts, such as Itay Michaeli of Citi Research, saw the quarterly results as a positive for the company he rates a buy.
“GM delivers a strong second quarter beat, plus reassuring outlook in the face of a stock that’s traded off 17 percent in the past month on street concerns about truck incentives rising, China profits evaporating and the entire ’15-’16 outlook being in jeopardy,” he wrote in a note to investors Thursday.
Some analysts have cut their ratings and price targets for GM stock amid the issues in China.
GM shares were up 4.5 percent around 1 p.m. Thursday at $31.68 on the results.
Revenue for the quarter totaled $38.2 billion, down 3.5 percent from the $39.6 billion earned a year ago. Analysts had expected revenue to top more than $40 billion, but GM said its revenue was negatively impacted by foreign currency exchanges.
The second quarter included special items including $720 million special item charges for further devaluing and writing down Venezuela operations and assets; a $297 million write-down of assets in Thailand; and $75 million for increasing the expected costs for the GM ignition switch compensation program.
Now, GM says it expects to spend $625 million on the compensation program, above original estimates. Stevens said the figure is “our best final estimate.” In April, GM said it expected to spend $550 million to $600 million on payments to families of people who died and to people who were injured by the ignition switch defect. That was increased from an initial range between $400 million and $600 million.
GM said Thursday it has paid out $280 million so far in the program.
Some at GM knew about ignition switch problems in older Chevrolet Cobalts, Saturn Ions and other small cars for more than a decade but did not recall 2.59 million vehicles until early last year. The automaker initially tied the defect — which can switch off the ignition, disabling power steering and air bags — to 13 deaths, but the independently administered ignition switch compensation fund has approved 393 total claims, including for 124 deaths and 269 injuries.
In China, the automaker for the first half of 2015 made $1 billion in equity income and had better than 10 percent margins in China, including a $27 million increase year-over-year in the second quarter. Stevens said the automaker has taken proactive measures in China to deal with the moderating growth, such as continuing SUV and vehicle launches and introducing cost-efficiency measures to mitigate the issues.
Stevens said GM remains committed to investing in new vehicles such as Cadillacs and more SUVs in China. It has announced $14 billion of investment in China over the next several years and Stevens said 75 percent of that is related to product.
“We are going to continue to invest from a product perspective in China because our view long-term in China hasn’t changed,” Stevens said. “In the next 10 to 15 years, this market is going to be a 35 million unit industry.”
Stevens said GM will evaluate capacity increases in China and will add capacity as required.
GM’s sales in China are up 4.4 percent in the first half of 2015 to a record 1.72 million, but overall June sales fell more than 3 percent and growth is starting to slow. Several forecasters are scaling back overall sales growth there for 2015. GM earlier this year estimated overall China market growth of 6 percent to 8 percent and Thursday said it now expects low single-digit growth there. It holds a 14 percent market share there.
GM North America adjusted net income totaled a record nearly $2.8 billion in the quarter, up from $1.39 billion a year ago when it was rocked by ignition recall related costs. Net income margin also reached 10.5 percent, a record for any quarter since 2009.
The automaker also reduced its losses in Europe to an adjusted net loss of $45 million compared to $305 million a year ago. For the first six months this year, GM has posted a $284 million loss in Europe.
GM International Operations posted adjusted income before taxes and interest of $349 million in its International Operations, slightly better than its performance a year ago. GM South America lost $144 million in the quarter, worse than the $81 million it lost in the quarter a year ago.
Prior to Thursday, the company’s stock had fallen more than 14 percent this year and closed Wednesday at $30.29, down 0.3 percent. Its initial public offering price was $33 a share.