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General Motors Earnings Analysis: By The Numbers


General Motors Company (NYSE:GM) reported preliminary financial results for the quarter ended December 31, 2014.

General Motors turned a profit in 2014 despite a $2.8 B pretax charge for 42 million GM automobile recalls. The company generated better-than-expected Q4 profits, with profits before dividends up 91 percent compared to Q4 2013. However, revenue in the quarter declined 2.2 percent in the quarter to $39.6 B.

With gas prices lower, the largest US auto maker sold more pick-up trucks and large SUVs in North America, GM’s most profitable market. At the same time, rival Ford’s (NYSE:F) truck plants were idled due to manufacturer retooling. North America notched a $2.21 B profit for the quarter, and GM has now captured 75 percent of the US large SUV market.

Globally, GM’s sales rose 2 percent to 919 million vehicles. European operations, however, were weak. Russia in particular was a drag on performance. European quarterly loss was $393 million vs. $363 million for the same quarter last year.

GM announced a 20 percent hike in its dividend for the next quarter.

This earnings release follows the earnings announcements from the following peers of General Motors Company – Ford Motor Company and Fiat Chrysler Automobiles N.V. (NYSE:FCAU)

Highlights

  • Summary numbers: Revenues of $39.62 billion, Net Earnings of $1.99 billion, and Earnings per Share (EPS) of $0.66.
  • Gross margins narrowed from 24.53% to 15.96% compared to the same quarter last year, operating (EBITDA) margins now 8.51% from 15.71%.
  • Narrowing of operating margins contributed to decline in earnings.
  • Earnings per Share growth exceeded earnings growth.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2013-12-312014-03-302014-06-292014-09-292014-12-31
Relevant Numbers (Quarterly)
Revenues (mil)4048537408396493925539617
Revenue Growth (%YOY)31.421.470.7-2.14
Earnings (mil)285021327814711987
Earnings Growth (%YOY)138.69-81.87-80.34-14.33-30.28
Net Margin (%)7.040.570.73.755.02
EPS0.570.060.110.810.66
Return on Equity (%)27.051.161.7812.8511.11
Return on Assets (%)6.810.50.633.314.48

Market Share Versus Profits

Companies sometimes focus on market share at the expense of profits or earnings growth.

Compared to the same period last year, GM’s change in revenue exceeded its change in earnings, which was -30.28%. This suggests perhaps that the company’s focus is on market share at the expense of profitability. But more importantly, this revenue performance is among the lowest thus far in its sector – inviting the potential for current and future loss of market share. Also, for comparison purposes, revenues changed by 0.92% and earnings by 35.08% compared to the quarter ending September 30, 2014.

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 24.53% to 15.96%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went fro 15.71% to 8.51% in this time frame. For comparison, gross margins were 16.16% and EBITDA margins were 8.97% in the quarter ending September 30, 2014.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. CapitalCube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

GM’s decline in gross margins is compounded by issues on the balance sheet side. There has been deterioration in working capital levels. The company’s working capital days have risen to 42.82 days from 42.36 days for the same period last year.

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 4.17% to 3.61% and (2) one-time items that contributed to a decrease in pretax margins from 6.44% to 5.78%

EPS Growth Versus Earnings Growth

GM’s change in Earnings per Share of 16.81% compared to the same quarter last year is better than its change in earnings of -30.28%. However, this change in earnings is better than the peer average among the results announced to date, suggesting that the company is gaining ground in generating profits from its competitors.

Company Profile

General Motors Co. engages in the business of design, manufacturing and sale of cars, trucks and automobile parts worldwide. it operates through five segments: GM North America, GM Europe, GM International Operations, GM South America and GM Financial. The GM North America segment sells vehicles under the brands Chevrolet, GMC, Buick and Cadillac with sales, manufacturing and distribution operations in the U.S., Canada and Mexico and distribution operations in Central America and the Caribbean. The GM Europe segment has sales, manufacturing and distribution operations across Eastern, Western and Central Europe including Russia and the other members of the Commonwealth of Independent States.

The GM International Operations segment has sales, manufacturing and distribution operations in Asia/Pacific, the Middle East, Africa and Eastern Europe, including Russia and the other members of the Commonwealth of Independent States. The GM South America segment sells vehicles under the brands Buick, Chevrolet, Holden, Vauxhall, Cadillac, GMC and Opel, with sales, manufacturing, distribution and/or financing operations in Brazil, Argentina, Colombia, Ecuador and Venezuela as well as sales and distribution operations in Bolivia, Chile, Paraguay, Peru and Uruguay. The GM Financial segment provides automobile financing solutions specializing in purchasing retail automobile installment sales contracts. It also offers a lease financing product for new GM vehicles and a commercial lending program for GM-franchised dealerships. The company was founded by William C. Durant on September 16, 1908 and is headquartered in Detroit, MI.