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General Motors Company (GM) Q4 Earnings Preview: Managing Costs The Key

 February 13, 2013 02:20 PM
 


(By Rich Bieglmeier) General Motors Company (GM) will host a conference call for financial analysts on Thursday, February 14, 2013 at 10:00 a.m. ET to review the company's 2012 full-year and fourth quarter business results. Wall Street anticipates that GM will earn $0.51 for the quarter. iStock expects the auto and truck maker to report earnings that will beat Wall Street's consensus number. The iEstimate is $0.55, a $0.04 upside surprise.

GM is the number one auto/truck maker in the world as measured by sales. In case you didn't know.

In its post reorganization life, the new GM has reported earnings eight times, beating the Street's consensus view a lucky seven times by an average of 18.3% with a range of 1.06% to last quarter's 52.46%.  The miss came in 7.14% under expectations.

[Related -Tesla Motors Inc (TSLA): How Tesla Fares Against Upcoming Electric Cars]

Unfortunately, the car company's stock price has performed upside down compared to quarterly results. Five of the eight profit checkups resulted in the stock losing an average of 5.3% in the days surrounding earnings. The max loss was capped at 9.8%.

The remaining three announcements rewarded stock holders with a gain of 7.37% with a max gain of 9.8% - matching the max downside – and minimum increase of 5.50%.

China and the USA are the two key markets for GM, with Brazil a distant third.  The trio of countries accounted for 2 out 3 cars sold in Q3 for General motors. China and the US combined for 57% of all GM cars and trucks sold worldwide for the three months ended September 30, 2012.

[Related -General Motors Company (GM): How Q3 Earnings Will Fare?]

So, let's look at the company's total deliveries for October through December 2012 to get a sense of what to expect. According to General Motors website, the company delivered 630,002 vehicles in the US during Q4. That's up a little more than 28,000 year-over-year (YoY) or 4.7%.

Things appear to be going well in China as sales hit 242,486 vehicles, rising 23.2 percent YoY and setting a record for the month, according to GM.

Last year, GM earned 39 cents in Q4 and disappointed Wall Street by 2 cents. Obviously, earnings per share will need to increase by more than 4.7% to hit Wall Street's target and our iEstimate.

The trick to meeting or beating the consensus will come from margins. In Q3, the Automotive cost of sales increased $1,001 per car while the Automotive gross margin fell by $267. That's not a good combination. The biggest contributor to the unwelcome mix was an "unfavorable vehicle mix of $1.8 billion." It essentially means moving out old inventory with slim to no margins, which could continue to hamper margins as inventory ticked higher from December to January by 2.9%.

On the plus side, GM gained $1.1 billion "due to the weakening of major currencies against the U.S. Dollar" in the third quarter. For much of the fourth quarter, the dollar fell; so, Q4 may not get the same benefit of roughly a penny per share for its Valentines' announcement.

Overall, despite strong sales figures, margin trends and the dollar could work against General Motors Company's (GM) bottom line for Q4, which could make it difficult for EPS to meet the consensus or iEstimate.

Forward guidance should be optimistic as management recently embarked on a plan to increase Chinese sales by 75% through the end of 2015. Investors and Wall Street will be listening keenly on the plan to get there; although, it's been reported that GM is looking to acquire ailing Chinese automakers. And, January got 2013 off to a hot start with sales up 16% in the US and its strongest month ever in China; however, as we mentioned a few paragraphs back, inventory continues to grow.

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