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General Motors (NYSE: GM) is enjoying a post-financial-crisis Renaissance, as the automaker has really geared up sales over the past few years. GM’s earnings, which I’ll discuss in a moment, are of primary importance not only to the company and investors, but for what it says about the overall economy.
Auto sales are true bellwethers. They are often the first segment we see weakness in as a recession approaches, and the first segment to demonstrate strength in a recovery.
GM delivered $1.19 per share of earnings in the quarter, and that destroyed analysts’ estimates of 83 cents. That translated to net income of $1.1 billion, or 66 cents a share, up a startling 21% from $900 million, or 57 cents a share, the year before. This came despite revenue falling from $40.5 billion to $39.6 billion.
That, of course, translates to higher operating margins.
There are two important elements in the GM numbers, other than the fact that they were robust. The company’s annual operating profit for 2014 was $6.5 billion, or $1.07 per share, which is incredibly impressive considering the company was on the ropes a few years ago. But it would have been $9.3 billion, or $1.65 per share, if not for costs associated with automobile recalls.
GM, however, remains a North American success story. On an operating profit basis, fully $2.2 billion of the company’s $2.4 billion came from North American sales – most of it due to higher margin sales of SUVs and pickups. Alas, Europe remains the company’s bugaboo, producing an operating loss of $400 million, the same as last year. Even worse, the company’s loss in Europe expanded to $1.4 billion from $900 million in 2013.
GM, however, claims that Europe will turn profitable in 2016.
Are these solid U.S. numbers limited to GM? Not according to the January auto sales report. Yes, GM’s sales increased 18%, so that bodes well for Q1’s earnings. However, all new car sales rose 14% to 1.15 million. Toyota Motor Co. (NYSE: TM) sales rose 16%, Ford (NYSE: F) and Nissan (OTCBB: NSSNY) each rose 15%. Some 55% of purchases were for trucks, vans, and SUVs.
Over at AutoNation (NYSE: AN), the trend is playing out, with EPS up 24% on a 12% revenue increase.
Lower gas prices helped drive demand, but hybrid sales got clocked. Toyota’s hybrid sales were flat with last year. Other drivers include low interest rates, abundant credit, and stable home prices.
Everything is lining up for the auto industry, in even more positive fashion than the past few years. I think any of the automakers are worth looking at for your portfolio, although I personally prefer the sales companies like AutoNation which have less risk in their business model.
In the case of GM, the financial bailout improved its position. It has $29 billion in cash and $27.7 billion in debt. My only concern is that free cash flow is not consistent.
I think you could do worse, but right now, jumping in to GM for appreciation and its 3.7% yield isn’t a bad idea.
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