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GM Improves in Europe, China

Detroit-based maker raising investor expectations.

by on May.02, 2013

General Motors' Q1 performance generated interest in the Detroit-based automaker's stock.

General Motors narrowed its losses and boosted its margins in Europe despite watching its overall net income decline in the face of a sweeping changeover at the company’s truck plant there.

Improvements in Europe and China and the anticipation of better results in North America helped to boost interest in GM shares, even as the U.S. Treasury Department reduces the government’s stake in GM. The U.S. Treasury still owns 18% of GM’s shares so any rise in the price of the shares benefits American taxpayers.

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“This was a solid quarter and we are much more of a formidable competitor now than we have been in more than a generation,” Chief Executive Dan Akerson said on a conference call. “We’re a very healthy company that’s getting stronger each quarter.”

Akerson also said during the call with analysts and reporters the company remained focused on key challenges such as bringing its European operations back to profitability by mid-decade.

“We’re cutting costs across the board. It’s too soon to call the bottom in Europe,” added Akerson, suggesting it could take another year to 18 months for the European economy to right itself. Nonetheless, RBC Capital Markets Analyst Joseph Spak indicates GM’s success in reducing costs is pivotal to continuing share price gains.

“Better-than-expected results (in Europe) will be well received, giving investors confidence that progress is being made and breakeven by mid-decade is possible,” he said in a research note.

Revenue fell 2.4% from last year to $36.9 billion, and was just above the Wall Street target of $36.6 billion.

Morgan Stanley Analyst Adam Jonas said in a research note that it was the first time in two years that GM’s Europe unit topped Wall Street expectations and it was the first year-over-year improvement in results in five quarters.

However, GM’s operating profit dropped by $200 million as it offered deals on its current large truck lineup ahead of the launch of new models. Going forward, analysts have warned that a weaker Japanese yen and deteriorating European market will likely lead to more competitive pricing in North America. Japanese automaker Nissan Motor Co. said this week it was cutting prices on seven models representing 65 percent of its U.S. offerings.

Akerson also cautioned GM’s costs in North America will rise in the second and third quarters because of the new-vehicle launches. It will also see more revenue from higher prices and lower incentives associated with the new cars and trucks.

(For a look at GM’s Q1 financial results, Click Here.)

The international unit, which includes China, had an operating profit of $495 million, while South America recorded a $38 million loss. Both results were weaker than expected.

South American deliveries fell mostly because of Venezuelan currency issues. GM reported $162 million in first-quarter costs associated with the devaluation of the currency.

In China, meanwhile, Akerson noted GM has “very high visibility” and is in the midst of raising its production capacity by 20%. At the same time, the company’s market share in China is increasing and the profit margin on every vehicle its sells in China increased to 11.8%.

(Click Here to read about April’s increased U.S. auto sales.)

GM is also seeing the payoff from its substantial investments in China in the form of improved operating leverage, noted Dan Ammann, GM’s chief financial officer.

GM said adjusted free cash flow in the quarter was a negative $1.3 billion due mostly to the lower earnings and timing-related items that it said would reverse during the rest of the year. The Detroit automaker ended the quarter with total liquidity of $35.3 billion in its automotive business.

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