What investors should take away from General Motors' weaker than expected fourth quarter is not the size of its earnings miss – although it was substantial – but how far the auto giant still has to travel before it can be pronounced fully recovered from its near-death experience at the height of the global financial crisis. It remains a work in progress.
So, if nothing else comes out of one of the bigger earnings disappointments of the season (67 cents U.S., excluding special items, vs. a consensus estimate of 88 cents), it ought to at least temper the misplaced optimism of punters who were all too ready to believe the auto maker's myriad problems were only visible in the rear-view mirror.
It's true that GM has made commendable progress on several fronts: Strengthening its balancing sheet; producing better, more marketable vehicles at lower cost; refilling its depleted coffers; and raking in a steady stream of profits. But making money shouldn't be that difficult when tens of billions of dollars worth of debt has been forgiven. Now comes the hard part – steering an effective restructuring course on a road that remains strewn with potholes.
These include dark clouds in its international operations, where adjusted operating earnings in the quarter slumped to $208-million from $676-million a year earlier. Take out China, and GM posted a loss of about $200-million, compared with a gain of $300-million a year ago. The main culprits were Europe and some key emerging markets in Asia and Latin America. Even the lucrative Chinese market poses a concern, as growth there is slowing and profit margins are narrowing. GM's pre-tax margin in China slipped to 7.6 per cent from 9.4 per cent in the previous quarter.
GM executives suggested that analysts didn't account for higher taxes and misread the nature of some European restructuring charges that had to be booked in the quarter to cover severance expenses related to the closing of a plant in Germany. "Our view is that the sell-side consensus didn't comprehend that [German] restructuring," chief financial officer Chuck Stevens said. "The final announcement associated with that wasn't done until early December. Due to that, we needed to book some of the restructuring costs, primarily related to the severance portion of that program."
In total, the company took $1.9-billion worth of charges, including $500-million stemming from the shuttering of Australian manufacturing operations and $700-million related to its removal of most Chevrolet-branded vehicles from Europe. On the plus side, GM has slashed its losses in Europe by more than half and still hopes to reach a breakeven point within two years.
In Canada, though, the company's market share shrank last month to 11.5 per cent from 14.4 per cent a year earlier, ranking it No. 3 in sales. For all of 2013, its share was 13.5 per cent, and it achieved that only through an incentive-heavy marketing blitz in December. The recovery in market share in the U.S., where it reached 18.3 per cent in January, plainly has not spread north of the border.
Fortunately, new CEO Mary Barra is displaying a welcome streak of hard-nosed realism about the auto giant's turnaround. Despite reaching some investor-pleasing milestones in the past year – rejoining the S&P 500, restoring an investment-grade debt rating and declaring its first dividend in six years – Ms. Barra said, "We clearly have a lot of work ahead to make all of our regions solidly and consistently profitable. It is going to be a multi-year journey."
Joining GM on that long ride could turn out to be profitable for investors, but it's bound to be bumpy along the way.