Automaker General Motors (click ticker for report: ) reported second quarter earnings that were slightly better than expected. GM earned a profit of $0.90 per share, higher than consensus estimates, but down substantially from last year’s $1.54 in the second quarter. Revenue fell 5% to $37.6 billion, which was about $1 billion shy of the Street’s expectations. Automotive free cash flow remained strong at $1.7 billion, albeit down 55% from a year ago. GM expects strong performance in North America during the third quarter, though the company doesn’t explicitly give guidance.
Speaking of North America, revenue fell about $200 million year-over-year to $22.9 billion. Market share for cars in the US fell over 300 basis points to 15.4% thanks to supply from Honda (click ticker for report: ) and Toyota (click ticker for report: ) coming back online, as well as strong performance from competitors like Ford (click ticker for report: ). As we’ve stated earlier, we aren’t over enthusiastic about GM’s product mix relative to its competitors, and we think the company is struggling to eliminate the “Government Motors” perception. However, we think strong sales data from Cadillac and Buick in July could support the theory that some of its brands are beginning to resonate with consumers. GM also remains committed to financing subprime car buyers. Unlike housing, subprime car loans aren’t nearly as risky, as the loans carry reasonably high interest rates and the collateral (in most cases the car itself) is easier to repossess than a home.
Not surprisingly, Opel, GM’s European brand, was a disaster. Revenue fell 21% and the segment swung to a $361 million loss compared to a $102 million profit during the same quarter a year ago. Management changes have run rampant at Opel, and the company remains committed to expanding its brand in Europe. The firm announced a $559 million deal with legendary English soccer club Manchester United to be the team’s jersey sponsor for seven seasons starting in 2014-2015, which the company hopes will raise brand awareness and prestige globally. We don’t think this will make Europe profitable overnight, and we think the company likely overpaid for its advertising rights.
International results remained relatively strong, as sales increased 8% year-over-year to $6.9 billion, though profits remained flat. GM is acquiring a stronger market position than Ford in China, and the ability to win share in a car market that could sell 30 million vehicles by the end of the decade could be a tremendous asset. The firm had 13.8% market share during the second quarter. Although we tend to like Ford better, GM’s presence in China is far superior, in our view.
Regardless, we think shares of GM are cheap…just not as cheap as Ford. The firm’s pension is currently underfunded by $15 billion, but the company’s improved cost structure and lump sum payments should allow it to close the gap going forward (as long as capital markets cooperate). Though we aren’t crazy about GM’s current position in the US or in Europe, we think the company has strong potential in China and that the automotive refresh cycle in the US will continue to benefit North American operations, even if the firm loses some share to its competitors. GM scores just a 3 on our Valuentum Buying Index (our stock-selection methodology), and since we already have exposure to the auto OEMs through Ford (which also pays a dividend), we won’t look to add shares to the portfolio in our Best Ideas Newsletter unless the valuation becomes too cheap to ignore.