GM Third Quarter 2013 Earning Preview: Profit And Revenue Seen Up, EPS Expected To Be Flat On Stock Dilution

UPDATE Oct. 30, 8 a.m. EDT: GM beat EPS by 3 cents and missed earnings by $500 million. Fundamentals show improvement in income from last year. The market rallied on Wednesday morning, pushing up GM's stock.

Original story begins here:

General Motors Co. (NYSE:GM) is expected to report a 5 percent jump in third-quarter revenue and 3.4 percent stronger net profit thanks to strong domestic and Chinese demand that should counter European losses and costs from the rollout of a major vehicle platform.

“Rising prosperity in emerging markets, led by China, should drive global demand growth,” Efraim Levy, autos analyst for Standard & Poor’s, said in a research note ahead of Wednesday morning’s third-quarter earnings report for the world’s second-largest automaker. “While U.S. demand will likely remain low by historical standards, we think higher total volume in the U.S. and abroad versus 2012 will help corporate profits and cash flows.”

Analysts polled by Thomson Reuters expect net income of $1.6 billion on $39.5 billion in the third quarter. Earnings per share will be flat year-over-year, at 93 cents, as warrants in the company related to its 2009 restructuring have been converted into common stock. In other words, GM profit has risen in the third quarter but the stock has also been diluted at the same time. On the bright side, GM is making more money per sale than it did last year, from 12.9 percent to an expected 15.4 percent in the third quarter.

U.S. auto sales are universally expected to top 15.5 million units this year for passenger cars and light trucks, the best rate since before the 2009 auto industry crisis. China deliveries should easily top 20 million. GM and Volkswagen AG (FRA:VOW3) have the highest exposure to Chinese market and should continue to benefit accordingly in the third quarter.

Meanwhile, back in North America, GM is involved in setting up K2XX, the vehicle architecture for its pickups and full-sized SUVs. It is in the 2014 Sierra and Silverado trucks and will show up in other new models in the first quarter of next year.

"From a preproduction startup perspective, relative specifically to the K2XX in Q3, we are going through the same launch process we went through with in Q2,” said Chuck Stevens, CFO of GM for the Americas, during a conference call in July. “So those costs will be present in Q3, and I would expect them to start to mitigate a little bit going into Q4.”

Also on the down side: fleet sales, or bulk purchases by corporations (mainly rental agencies) and governments, a key business for GM, have been down slightly in this quarter, as they have been for the year. Don Johnson, GM’s vice president of Chevrolet U.S. sales and service, said in a conference call Oct. 1 that fleet sales are down 3 percent through September and that the company is currently trying to get to flat for the year.

In part because of the slow feet sales, GM’s popular Cruze, the company’s best-selling sedan, was up to a 65-day supply entering October after sales plummeted 50 percent last month (the Chevy Equinox mid-sized crossover outsold the Cruze last month, which is unusual). A healthy average for a popular model is 60 days, so GM is a little top-heavy on its Cruzes. The company has said it hopes to claw back more fleet sales in the coming months, which would help bring down the oversupply -- at what cost to margins will have to wait until the next earnings report. Estimates say margins will fall in the fourth quarter anyway, which is typical as car companies and dealers push to clear lots during holiday car shopping.

GM saw sales rise in July and August, by 14 percent and 15 percent, respectively, while sales fell in September by 11 percent, in part because of an unusually low number of selling days last month and because Labor Day shopping weekend sales were booked in August.

Major personnel moves occurred in GM global operations in the third quarter, underscoring the importance of business outside of North America. Last year, about 68 percent of all GM sales took place outside of North America.

The most significant move was appointing Timothy Lee, 62, to head GM China Inc. Lee, who has headed GM operations in the Asia-Pacific region and Venezuela, as well as serving as vice president for labor relations and manufacturing in Europe, will oversee a dozen joint ventures and 55,000 employees GM has in China. GM also hired AB Volvo (STO:VOLV-A) CEO Stefan Jacoby to become executive vice president of consolidated international operations (he’ll oversee GM operations in more than 100 countries) and Michael Dunne, a Detroit native who founded a Hong Kong-based auto consultancy, to head GM’s Indonesia operations.

The company continues to feel the bite of an auto sales slump in Europe, where the company is operating at a loss. In September during the Frankfurt auto show, Opel Chairman Stephen Girsky expressed metered optimism that the worst is behind GM and that eventually pent-up European demand will allow the Opel subsidiary to report a profit by mid-decade. Opel displayed nearly two dozen new models and 13 new powertrains expected by 2016.

Entering the third quarter, GM had $34.8 billion in available liquidity and $26.8 billion current liabilities, excluding the $26 billion in unfunded pension obligations.