Analysis of GM’s outlook
TOM HUDSON: General Motors (NYSE:GM) got a yellow caution flag in the
final lap of last year. The company’s fourth quarter earnings came in at
$0.39 a share. That was $0.02 below Wall Street estimates and down $0.13 compared to the same period a year earlier. The company blamed its disappointing performance in the final quarter last year on problems in Europe and South America. Diane Eastabrook has more from Chicago.
DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: It wasn’t all bad news for GM today. The company’s 2011 profits increased more than 60 percent to $7.6 billion. Last year was GM’s first full year operating as a public company since emerging from bankruptcy. Beyond that, the news for the world’s largest auto maker gets darker. While North America seems to be finally firing on most cylinders, both Europe and South America are flagging and Europe is the biggest problem. The region’s debt crisis and stagnant economy have stalled vehicle sales. Morningstar (NASDAQ:MORN) auto analyst David Whiston says GM’s options are limited.
DAVID WHISTON, AUTO ANALYST, MORNINGSTAR: Really, your only options
are to either close plants and/or amend the labor contracts with the unions and I think the really, really hard part is how are you going to get the unions to play ball when their contracts don’t expire until 2014, and unions over in Europe are very, very militant.
EASTABROOK: GM also acknowledged possible headwinds in North America. The company is selling more cars, especially small ones, than pricier pickups and sport utilities. Whiston says the company needs to carefully manage supply and demand of those products without offering steep incentives.
WHISTON: In other words, have a great product and produce only to meet demand rather than overproducing and then you would have to put up a ton of cash, which kills residual values. And you get in a horrible spiral that we had before that ultimately led to bankruptcy, but we’re not going down that path again.
HUDSON: Diane joins us now from the CME Group (NASDAQ:CME) in
Chicago. Diane, when looking at these two big regions Europe and the U.S., let’s tackle the U.S. first with General Motors (NYSE:GM), what is selling in the United States, a question of consumer demand and profit margins, so how much of that is under GM’s control?
EASTABROOK: Not a lot unless they can control oil prices. We’ve
seen this phenomenon, Tom, over the past few years when we see prices at the pump go up. People migrate into small cars and hybrids. We see pump price goes down. They start buying SUVs and pickups again. And energy analysts are talking about the possibility of $5 gasoline this summer, so that really doesn’t bode too well for those pickups and sport utilities.
HUDSON: Close to $4 here in south Florida and I am sure you are over
that in some places in Chicago already. In Europe meantime, how realistic are these ideas of actually closing plants or laying off European auto
makers, auto workers?
EASTABROOK: Well, it sounds like it’s a really tough sell, but there
are some things that GM can do in Europe. It’s talking about cutting costs. It’s talking about possibly consolidating some back-office operations, in Voxal and in Opal. And one of the things that Whiston mentioned today which is interesting, is possibly moving some Chevy manufacturing from South Korea over to Europe where they have excess capacity. So that’s one option that they might be able to pursue.
HUDSON: Soak up some of that production in Europe. Let’s talk about
the stock, shares of GM. It went public at $33 per share, had a nice 9 percent rally today, but it is still trading well below its IPO price. What
is the company telling investors to look forward to this year?
EASTABROOK: You know, they didn’t give a whole lot of guidance on
that today, Tom. The only thing they did mention is here in the United States they are talking about U.S. auto sales reaching between 13.5 million and 14 million this year. And that’s about in line with what the company was looking at at the end of 2011.
HUDSON: Any idea why not a whole lot of financial guidance for the
year? Is that a change in direction?
EASTABROOK: You know, I think right now there’s just a lot of
uncertainty in Europe and Latin America. And you know, it’s dicey. I don’t think they really want to speculate on what’s going to happen the remainder of the year.
HUDSON: What about government ownership, meantime. Uncle Sam still
owns more than a quarter of this company. What’s next for the government
part of it?
EASTABROOK: Well, earlier this week or last week, Mitt Romney was
talking about the government unloading that stock. But I don’t know if that is maybe the best idea. The government and taxpayers would take a loss. You might want to see the government hang on to that stock until it reaches maybe about $50 a share.
HUDSON: At that point maybe taxpayers will get a bit of a premium, a
bit of a profit. Diane, always great to catch up with you on the auto beat, our Midwest bureau chief from the CME Group (NASDAQ:CME) in Chicago, it’s Diane Eastabrook.