GM reports record profit, gets punished by the market
If you're an automaker, especially one from Detroit, conditions probably aren't going to be better for you to make a lot of cash. For General Motors, that's what happened last year as the company posted a record US$9.7 billion net profit.
A good chunk of that was a US$3.9 billion one-time accounting gain due to better prospects in Europe, but the company still made billions on booming sales of its strong line-up of SUVs and trucks, mainly in North America.
Earnings were so strong that most of GM's 49,600 hourly workers will get US$11,000 profit-sharing cheques on February 26. The cheques were based on North American pre-tax earnings, which hit a record of just over US$11 billion for the year.
Yet even with the earnings, GM gets no respect from the stock market. Its shares were down 3.5 per cent at midday Wednesday to US$28.61. Investors haven't been kind to auto stocks for years. GM shares are down more than 15 per cent in the past year, and are more than US$4 below the company's initial public offering price of US$33 in November of 2010.
The strong performance actually worked against GM, with investors fearing that auto sales have peaked and the US is towards the end of a seven-year positive economic cycle, said Jeff Windau, equities analyst with Edward Jones in St Louis.
Although GM executives tried to highlight that there's still room for growth, investors are sceptical about what will drive it, he said.
"As you post strong numbers, it raises the question of how much better can it get?" said Windau, who gives GM a "Hold" rating but forecasts modest sales growth.
Excluding special items, GM earned US$5.02 per share for the year, beating Wall Street estimates of US$4.82. Full-year revenue fell just over two per cent to US$152.4 billion, but still beat analyst estimates of US$144.9 billion.
For the fourth quarter, GM posted a profit of US$6.3 billion, including the accounting gain in Europe. GM expects to break even there this year and took the gain because prospects for making money are good.
Without special items, the company earned US$1.39 per share, beating estimates of US$1.20. Fourth-quarter revenue was flat at US$39.6 billion, just below Wall Street expectations.
In Europe, GM lost US$298 million before taxes, narrowing the loss from last year. International operations, including China-made US$408 million, while the company lost US$47 million in South America.
Chief Financial Officer Chuck Stevens said he wasn't worried about the full-year drop in revenue, blaming currency fluctuations for about a US$10 billion decline.
"Size for size's sake is not something that drives us," he said. "Growing profitability is much more important to us than growing revenue."
Stevens argued against the theory that the US economy is poised for a downturn, saying that fundamentals remain strong. Still, GM will maintain a low break-even point, seek cost efficiencies and control inventory levels just in case, he said. "We believe we are well-positioned for the downturn," he said. "We just don't think it's going to happen anytime soon."
The stock drop came even though GM has increased its dividend and raised its stock buy-back programme to US$9 billion. During the year, it returned US$5.7 billion to shareholders, including US$3.5 billion in stock buy-backs and US$2.2 billion worth of dividend payments.
Stevens said the market should respond if the company keeps meeting commitments and following its plan.
"We're confident that if we execute the plan and continue to build that track record, we'll drive shareholder value and it will be reflected in the share price," he said.