General Motors (GM) announced its first quarter earnings this morning, and they beat most analysts' expectations. The prevailing theory on GM has been that it's struggled since its IPO last year. But a $3.2 billion profit, along with a strong belief that it will reclaim the global number one spot it lost to Toyota (TM) in 2008, suggests that GM has somebody looking out for it up there. Here are four explanations to consider:
- Toyota in crisis. Almost as soon as Toyota finally ascended to the top spot worldwide, capping decades of continual effort and admirable discipline, it all went to pieces. The Great Recall of 2010 was followed by a management shakeup and then a devastating earthquake/tsunami/nuclear meltdown that crippled the carmaker's supply chain. Toyota may not be able to restore full U.S. production until the end of the year. Combined with similar troubles for other Japanese carmakers, this has enabled GM to grab 20 percent of the North American market.
- Rolling the dice on incentives. GM doled out hefty incentives at the beginning of the year, cutting into profits but picking up market share. This was a calculated risk that's now paid off. The company's profits were obviously better than anticipated and so could absorb the incentives spending. Meanwhile, GM now has more people owning one of its vehicles, in the U.S., than any other automaker. Incentives are often criticized, but used correctly, they can achieve major strategic returns. GM has often been the incentives king when, in the past, it overproduced. This time, however, a leaner operation appears to have gotten the calculus right.
- Ignoring Wall Street. CEO Dan Akerson is doing exactly what he needs to do to bolster GM's share price, even though investors remain curiously skittish. The stock is currently highly undervalued relative to GM's peers, and if GM can restore an investment-grade bond rating, the opportunity will be there for institutional investors to buy in. What's sustaining Wall Street's negativity is the determination of the Treasury to sell its remaining 26.5% stake in GM for a loss later this year. This decision is politically motivated, as the Obama administration doesn't want to be answering questions about "Government Motors" during a campaign year. But President Obama doesn't want to run for re-election with gas at $5 a gallon either. And any downward pressure on fuel prices is a formula for more GM profits, especially as the lucrative truck market recovers.
- The auto market is expanding once again. 2009 delivered the Mother of All Downturns, with a market that once stood at 17 million in 2005 plunging to barely 10 million in 2010. However, this was beneficial for GM in that it restructured itself in bankruptcy to have greatly reduced debt and a brand portfolio than could make money in a market with only 10 million in annual sales. The market now looks to on track to hit at least 13 million this year, with 14 million a possibility. Many analysts expect it to stabilize at 15 million, but I think it could go higher when the housing market bounces back, in the 2012-13 period. New home construction means new pickup truck sales. And as I pointed out above, trucks mean hefty profits. Between them, GM and Ford (F) own the U.S. truck market.