Detroit: General Motors Co’s quarterly profit nearly doubled, beating expectations, as the top US automaker took a larger share of global sales and raised prices on its vehicles at a time when major Japanese competitors were largely sidelined.
Despite the stronger-than-expected results, GM faces a tough second half of 2011 with risks from a sputtering economy and Japanese rivals itching to retake share as they recover from the March earthquake in Japan.
GM shares, which initially rose after the results, were down 3.2% in early trading.
“It was a solid quarter that shows GM’s return to health is on track,” said Matt Collins, an analyst with Edward Jones. “But with Japanese automakers getting back in the game while the economy appears to be stalling, this is probably as good as it gets this year.”
Coming out of bankruptcy, GM chief executive Dan Akerson and other executives said the company had stripped out enough costs to recession-proof the business so it could thrive even in a weak auto market.
The first major test for that claim for investors, including the US Treasury, will be how GM performs if the economy slips back into recession.
“There is an increased level of uncertainty,” GM chief financial officer Dan Ammann told reporters. “But what we’re trying to do, and what we’ve done successfully, is to configure the business with a low break-even point and a strong balance sheet so we can handle whatever scenario comes along.”
The US automaker is pushing heavily into smaller, more fuel-efficient cars like the popular Chevrolet Cruze, but a good portion of its profit still relies heavily on sales of more profitable trucks in the US market.
Higher pricing and reduced discounts on strong-selling vehicles like the Cruze and the Chevy Equinox drove GM’s profitability in its home market in the second quarter.
Jefferies analyst Peter Nesvold said GM had been expected to get a lift from higher vehicle pricing in the second quarter after it eased off the discounts it offered to car buyers at the start of the year.
“The pricing result was even stronger than anticipated,” Nesvold said, although he said it was an open question whether GM could sustain the resulting profit margin in North America.
‘We want to return cash’
Net income in the second quarter rose to $2.52 billion, or $1.54 per share, from $1.33 billion, or 85 cents per share, a year earlier.
The earnings per share blew past the $1.20 analysts polled by Thomson Reuters I/B/E/S had projected on average.
Revenue rose 19% to $39.4 billion, above the $36.74 billion analysts had expected during a quarter in which US auto sales hit a soft patch.
The results represent the second full quarter since GM’s IPO and a restructuring intended to keep the largest US automaker profitable through the industry’s punishing boom-and-bust cycles.
Some analysts said the quarter was strong enough to dispel recent doubts about GM’s performance.
J. P. Morgan analyst Himanshu Patel called the results a “clean beat” of Wall Street expectations.
“We believe this quarter should begin to revive momentum around the GM story,” Citi analyst Itay Michaeli said.
Michaeli said in a note that he expected the second-quarter result to prompt investors to raise their valuation for a stock that has dropped by more than 25% since the start of the year.
GM emerged from bankruptcy in 2009 after a $52 billion taxpayer-funded bailout orchestrated by the Obama administration. The US Treasury still owns 32% of GM’s common shares.
The company boosted its second-quarter earnings before interest and taxes by $1 billion by pushing through higher prices on its vehicles globally.
GM said its share of global vehicle sales rose to 12.2% in the quarter from 11.6% a year earlier. GM’s largest US rival, Ford Motor Co, also gained share in the second quarter.
GM reported profits in all its operating regions, including Europe where it has been struggling to restructure its Opel unit. It was the first time all four regions were profitable for the automaker since the IPO.
GM’s gains came as its Japanese rivals, led by Toyota Motor Corp, struggled with fewer vehicles to sell due to disruptions to the supply of auto parts after the Japan earthquake.
If the US recovery hits a pothole in the second half, GM could be forced to raise incentives on its vehicles to lure shoppers. GM’s first-quarter results were marred by heavy incentives, but the automaker dialed back those deals.
For the second half of the year, GM expects its adjusted earnings before interest and taxes to be “modestly” lower than the first half but full-year results to improve over 2010.
GM ended the quarter with total liquidity of almost $40 billion, up from $36.5 billion at the end of June. Ammann said the company’s focus would be on maintaining its “fortress balance sheet” to reinvest in the business and withstand any economic shock.
“We want to return cash to shareholders. When and how and in what form that will happen has yet to be determined,” he said.