General Motors Co., 33 percent owned by the U.S., fell by as much as 3.7 percent after the company topped analysts’ estimates for the second quarter and said the car company may be less profitable in the second half.
GM declined 96 cents, or 3.5 percent, to $26.21 at 2:11 p.m. in New York Stock Exchange composite trading after reaching $26.16. The shares have fallen 21 percent from their $33 initial public offering price in November, reaching an intraday low of $26.13 yesterday.
While GM reported a larger-than-expected profit, investors are wary that such results aren’t sustainable. Earnings were helped by building more trucks, and pricing benefited from the limited supply of vehicles by Japanese competitors, which plan to return to full capacity in the second half.
“Their outlook going forward is for weaker earnings, that’s why the stock is going down,” said Darren Fabric, a Chicago-based managing director at IPOX Capital Management LLC, which sold the shares it acquired in the initial public offering earlier this year. “Economic numbers are weak, and car sales are going to be levered to that.”
Profit climbed to $2.52 billion, or $1.54 a share, from $1.33 billion, or 85 cents, a year earlier, Detroit-based GM said today in a statement, topping the $1.20 a share average estimate of 13 analysts surveyed by Bloomberg. Sales rose 19 percent to $39.4 billion, exceeding the $36.4 billion average of eight analysts’ estimates. Net income was $2.99 billion.
“It’s a solid quarter,” Chief Finance Officer Dan Ammann said in an interview. “We had good revenue growth and good earnings growth. We were profitable in every region of the world. That’s an important first for us.”
Ammann said on a conference call with reporters that GM’s share price seems to be moving along with the stock market. The Dow Jones Industrial Average fell 361.43 points, or 3 percent, to 11,535.01 at 2:12 p.m.
“Our job is to run the business and put up results,” Ammann said. “It’s obviously a very tough market overall.”
GM said adjusted earnings before interest and taxes in the second half may be lower than the first six months. Full-year Ebit will “show solid improvement” from 2010, GM said.
GM’s profit rose as its U.S. sales increased 11 percent. The Chevrolet Cruze was the top-selling car in the market in June and the Chevy Silverado full-size pickup remained the second-most popular vehicle, behind only Ford Motor Co.’s F-Series line.
GM’s U.S. sales climbed to 669,065 light vehicles in the second quarter, according to Autodata Corp., a researcher based in Woodcliff Lake, New Jersey. GM gained market share after Toyota Motor Corp. and Honda Motor Co. lost production because of the March earthquake and tsunami in Japan.
GM boosted profits by adding to truck inventories in the quarter. GM has 115 days’ supply of pickups -- one of the company’s most profitable vehicles -- compared with 67 days worth of pickups held by rival Ford. Automakers record revenue when vehicles are shipped to dealers.
Ammann said that building up truck inventory added about $350 million to GM’s bottom line. If inventories grow, GM may cut production, Ammann said.
“We’re going to watch the supply-and-demand equation very closely,” he said on Bloomberg Television’s “InsideTrack” with Erik Schatzker. “The main lever that we will use should demand weaken is that we’ll modulate production. We don’t intend to lead with incentives.”
GM said it has normal capacity in its three full-size pickup plants of about 780,000 units. Those plants will be able to make about 640,000 units next year, when the automaker has said it will idle factories to convert them for output of its next-generation trucks.
North America Progress
The nation’s largest automaker earned $2.25 billion in North America before interest and taxes, up 41 percent from a year ago. Analysts were watching GM’s North American profits because rising costs in the first quarter undercut the automaker’s progress in its home market.
In Europe, GM earned $102 million before taxes and interest. The company’s international operations unit, which includes China, made $573 million, and the company made $57 million in South America.
Higher prices added $1 billion in earnings before interest and taxes, with half of that coming in North America, Amman said.
GM kept costs in control and got much better pricing, which is why the automaker beat earnings expectations by so much, said Peter Nesvold, a New York-based analyst with Jefferies & Co. For the quarter, GM’s revenue rose 18 percent and operating income rose 29 percent. In the first quarter, rising costs eroded the profit from boosting sales.
“We were anticipating that pricing would be better,” Nesvold said in a telephone interview. “It was even better than we imagined.”
GM said the Cruze is selling for $4,200 more on average than the Chevrolet Cobalt car that it replaced. Buyers are paying $7,000 more for the refreshed Buick LaCrosse sedan and $3,800 more for the Chevrolet Equinox sport-utility vehicle, compared with 2009 average prices.
Ammann said on the conference call with reporters that GM has raised vehicle prices three times this year for a total increase of about $500 a vehicle, or 1.9 percent.
Reaction to GM’s earnings will depend on whether investors think the pricing gains will continue, Nesvold said. If they believe that the improvements are because of the temporary inventory shortage among Japanese automakers then the market won’t reward GM for its strong earnings.
“That will be the big debate,” Nesvold said. “Are these pricing gains sustainable in the second half of the year?”
The U.S. Treasury Department, which holds the government stake, planned to evaluate the earnings and the market’s reaction before deciding whether to sell more of its investment, a person familiar with the matter said last month. The department wants to sell its stake for at least the IPO price of $33 a share and would prefer to sell in the high-$30 range, a person familiar with the matter has said.
The U.S. took a 61 percent ownership of GM as part of the automaker’s government-led bailout and bankruptcy reorganization in 2009. The Treasury sold shares equal to a 28 percent stake in the IPO.
Some investors are wary of getting back in until auto sales improve and Treasury sells some stock, said Itay Michaeli, an analyst with Citi Capital Markets. U.S. deliveries ran at a seasonally adjust annual rate of more than 12 million for seven months before slowing in May and June.
GM’s automotive operations had $33.8 billion in cash as of June 30, from $30.6 billion at the end of the first quarter. The automaker has reduced debt to $4.7 billion from $8.2 billion a year earlier.
General Motors Financial Co., GM’s finance unit, helped double the automaker’s share of U.S. sales to lease customers to 13 percent in the second quarter, from 6.5 percent a year earlier, according to slides posted on GM’s website. Deliveries to subprime buyers were 6.8 percent of U.S. sales in the quarter, up from 4.9 percent.
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