GM not out of the woods yet

The automaker posts its fifth consecutive quarterly profit -- an impressive $3.2 billion -- but the news may not be as good as investors and consumers think. Includes video.

By InvestorPlace May 5, 2011 9:30AM

By Jeff Reeves, editor of InvestorPlace.com


investorplace logoIn November, General Motors Co (GM) emerged from bankruptcy and raised more than $20 billion re-entering the stock market at $33 a share. But there haven't been a lot of fireworks since then. Almost six months later, the stock price is largely unchanged.

 

But there was good news Thursday for investors looking for growth and consumers worried about their favorite brands like the iconic Corvette. The company just reported great sales for first quarter of 2011, marking the fifth consecutive quarterly profit.

 

So what does this mean for General Motors cars, customers and investors? Well, unfortunately, the news may not be as good as you think.

 

Post continues after video:

Yes, first-quarter net income surged over the first three months of the prior year -- $3.2 billion in 2011, compared with $900 million in 2010. But take that with a grain of salt, as we are comparing current sales with one of the darkest periods in the history of General Motors. At the beginning of 2010, GM was still a bankrupt organization struggling to return to profitability. A year makes a lot of difference.


Jeff ReevesYes, the company was bleeding billions of dollars each quarter in 2008, so these developments are very good. However, it's important to acknowledge how low the bar was that GM just stepped over this time.

 

Another impressive statistic involves strong sales increases at home and abroad. Specifically, worldwide sales climbed 12% and domestic sales surged 25% over 2010. This is indeed encouraging. But General Motors is recovering only slightly faster than competitors as the auto market in general rebounds, and again, we are measuring growth based on previous historic lows for GM.

Consider that competitor Ford (F) saw U.S. sales rise 16% -- not as much as GM but still an impressive sign that GM isn't alone in its positive performance. What's more, Ford outsold General Motors in April for only the second time in 13 years, thanks to gains in market share during the past few years as GM suffered.

 

In short, GM's growth involves making up a lot of lost ground, not necessarily a return to dominance.

 

Last but not least, we can't overlook one-time benefits that juiced GM's numbers. Consider that the recent $1.6 billion sale of its stake in auto parts division Delphi accounts for half of General Motors' quarterly income. Those are real profits that the company can put to use, but obviously GM can't just sell off divisions every few months to make money. It needs to develop a sustainable way to get bigger profits.

So while there are many reasons to be optimistic about the future of General Motors and the solvency of this American manufacturing icon, let's not declare the Detroit automaker back in top form just yet. There are many reasons that shares of GM stock have been flat since the mammoth IPO six months ago and, more importantly, that GM shares are trading down despite the seemingly impressive numbers.


The reality is that this kind of growth is nice but General Motors has a long way to go.


Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks or funds named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.


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2Comments
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What I don't like is the fact the American people bailed out GM and one of the first things they did was go to China and make a deal to create 3,000 jobs over there.   I also believe what will happen with the stock the American Gov't owns will be sold at a loss.   The American tax payers will be taking a triple whammy.    Good bye American pie, I will be looking for a new car from some other car dealer. 
May 5, 2011 5:51PM
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Was that before or after the recall ?
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