Bloomberg News

GM Failure to Match Ford Profit Means Investors Doubting

June 07, 2011

(Updates with closing share price in 14th paragraph.)

June 7 (Bloomberg) -- At General Motors Co.’s first annual meeting since going public again, Dan Akerson can talk up market-share gains and profit that old GM hadn’t seen in a decade. What he can’t do is take a victory lap.

GM is trading 13 percent below its $33 price when Chief Executive Officer Akerson led the initial public offering in November. He has yet to show investors that Detroit-based GM has the operating efficiency or future product plan to match the profits of Ford Motor Co., which made 36 percent more money in the first quarter, excluding one-time items.

Excitement around the IPO led the automaker and the U.S. Treasury, its biggest investor, to expand the sale to $15.8 billion in common equity plus preferred stock. Since then, GM has tumbled and investors are waiting to see a plan to match Ford’s profit or even buy out the government’s stake, said Peter Nesvold, a Jefferies & Co. analyst.

“It’s surprising,” Nesvold said of the sinking stock price. “They kept the company together and brought it a long way, but investors haven’t really bought into the story that it’s a new GM.”

GM executives have discussed buying back shares from the Treasury Department, people familiar with the matter have said. The Treasury Department is reluctant to sell because the share price is low and because the political perception would be that GM is getting a preferential deal, one of the people said.

No Victory Lap

While Akerson said GM has more to do to improve operations, he also said that GM’s stock has not suffered any more than other carmakers.

“No one is doing a victory lap,” Akerson said. “The stock has performed on the same order of magnitude as our primary competitors. No one said this was going to be a layup.”

GM may earn adjusted net income of $7.72 billion this year, the average of 10 analysts’ estimates compiled by Bloomberg. Profit on an adjusted basis may rise to $9.55 billion in 2012, according to 10 estimates.

Akerson told reporters in a briefing before the meeting that he is concerned about the pace of economic recovery.

“There is some concern about a jobless recovery,” Akerson said. “There’s some question about how strong this recovery will be.”

GM may not be able to generate much investor interest until the economic recovery gains more traction or until the company puts up a few more quarters of solid numbers, said David Whiston, an analyst with Morningstar Inc. in Chicago. In the first quarter, Ford made $2.55 billion while GM made $1.88 billion not including one-time gains for asset sales.

Government Stake

The government owns 33 percent of GM and would like to sell some of its stock this year, said three people familiar with the matter. The government wants to sell for at least the $33 initial public offering price and needs a catalyst to get it there, the people said.

The Treasury Department may sell late summer or early fall. If the stock does not rise to an acceptable price, Treasury may not sell in this year, one of the people said.

GM rose 22 cents to $28.78 at 4 p.m. in New York Stock Exchange composite trading.

GM’s shortcomings are highlighted in comparison to Ford, where CEO Alan Mulally kept his management team together and avoided bankruptcy. GM earns less in North America and Europe than Ford, which also has a large and profitable credit arm that is expected to deliver $2 billion in cash dividends to the parent company this year, Nesvold said.

Ford’s Slip

While Ford’s shares have slipped more since GM’s IPO, its stock still trades at a higher valuation. GM’s stock trades at 5.5 times its earnings while Ford trades at 6.9 times earnings, according to Bloomberg data. Ford’s market capitalization is $52.8 billion and GM’s is $44.6 billion.

Ford is making more money in North America, even though GM has higher sales volumes and a cost advantage. In the first quarter, Ford made $1.8 billion in pretax operating profit in its home continent, compared with $1.3 billion for GM.

One problem for GM is pricing. In the first quarter, GM led the industry in spending on discounts, which reduced profit by $300 million. Meanwhile, Ford raised prices on its cars, which added $700 million in pretax profit.

“That’s a $1 billion difference,” Whiston said. “I’ll be watching to see if GM’s pricing gets better in the second quarter.”

Price Gap

After incentives, the Ford Fusion sells for $22,276, which is $1,342 more than the competing Chevrolet Malibu, and the Ford F-Series pickups sell for an average price of $30,898, which is $1,947 more than a Chevy Silverado, according to Edmunds.com, a consumer-research website based in Santa Monica, California.

In Europe, GM broke even in the first quarter, excluding a goodwill impairment charge, while Ford made $293 million in operating profit in the market.

Even in South America, where GM is the market leader, Ford made more money. The Dearborn, Michigan-based automaker earned $210 million, more than double GM’s $100 million in first- quarter pretax profit there. GM’s 20 percent of the market more than doubles Ford’s 9.4 percent, according to researcher IHS Automotive.

Akerson said GM will push for more growth using two global brands, Chevrolet and Cadillac. He said GM will start pushing the Cadillac brand internationally and will produce more of its cars overseas starting next year.

“You’ll see model expansion in Cadillac,” Akerson said. “We’ll flank our two global brands with regional brands.”

Finance Company

GM’s other disadvantage is in auto finance. Ford Credit earned $713 million in the first quarter compared with GM Financial’s $130 million. GM is rapidly expanding the operation and later this year will move into wholesale lending, which is extended credit to dealers so they can buy inventory, GM Financial CEO Dan Berce said in a June 1 interview.

The in-house lending unit would also consider starting an insurance unit to sell products to GM’s car buyers, he said. The company may also make acquisitions to expand lending operations overseas, Berce said.

Improvements in the global economy that boost consumers’ confidence and willingness to spend on durable goods may help GM improve its profit and stock price, said Kirk Ludtke, senior vice president of CRT Capital Group LLC in Stamford, Connecticut.

“GM’s numbers have been underwhelming, but GM is a cheaper stock than Ford,” he said. “If the economy comes back, the stock could really take off.”

--With assistance from Craig Trudell in Southfield, Michigan. Editor: Kevin Orland

To contact the reporter on this story: David Welch in Detroit at dwelch12@bloomberg.net.

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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