GM Posts Best Earnings Quarter in More Than A Decade

General Motors reported first quarter earnings of $3.2 billion, its fifth consecutive profitable quarter and its best quarter in more than a decade. The performance, combined with the impact of the earthquake in Japan last March on Toyota's operation, should drive the company to regain the global lead in auto sales this year.

The automaker, which is still 26.5% owned by taxpayers owing to the government assisted reorganization of the company in 2009, should show continued improvement the rest of the year as demand for new vehicles is expected to creep up and Japanese automakers like Toyota and Honda have production shortages due to the March earthquake in Japan that has crippled that country's infrastructure and damaged auto and parts plants.

Despite the positive news, GM shares were trading down about 1% this afternoon.

GM showed a 25% sales increase in the U.S. from last year during the first quarter, better than the 20% gain reported by the industry as a whole. The company drove some of that gain with aggressive incentives, but they have backed off that strategy. The looming shortages of products from the Japanese automakers has made that strategy easier to employ.

Earnings were better than Wall Street expected, and included $1.9 billion in one-time gains for the sale of GM's ownership interests in parts company Delphi and the Ally Financial credit-company. GM also took charge of $500 million related to its international business.

Overall earnings were $1.77 a share, compared with 55 cents in the quarter a year ago. Without the charges and on-time gains, the automaker earned about $1.7 billion in operating earnings, its best quarterly performance since the late 1990s. Revenue in the quarter increased 15 percent to $36.2 billion. North American operations, which has been GM's biggest headache over the last decade, reported earnings before interest and taxes of $2.9 billion, compared to $1.2 billion a year ago.

"We are on plan," said GM chairman and CEO Daniel Akerson. "GM has delivered five consecutive profitable quarters, thanks to strong customer demand for our new fuel efficient vehicles and a competitive cost structure that allows us to leverage our strong brands around the world and focus on driving profitable automotive growth."

Two years ago, there was much drama and public debate about whether taxpayers should intervene in GM's fortunes, risking billions to save a company that has steadily lost market share and credibility over the last two decades. Since the bailout that saved the company, as well as the fortunes of parts companies and workers connected to its North American businesses, the company has often been dubbed "Government Motors" by opponents of the bailout, including many members of the media.

But the Center for Auto Research, located in Ann Arbor, MI, estimates that the government rescue saved 1.14 million jobs in 2009, and another 314,000 jobs in 2010. GM, Ford and Chrysler, moreover, have been adding U.S. jobs in the last six months. "Besides the actual economic impact, and the jobs, there is enormous symbolic value to the U.S. auto industry globally that certainly factored into the desire and need to support the industry," said former White House auto industry task force member Steven Rattner during a Detroit visit to promote his book: "Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry; Houghton Mifflin Harcourt, 2010.

Depending on when the U.S. Treasury decides to sell its shares in GM, taxpayers could conceivably break even on the more than $60 billion invested in GM. If the cost of unemployment benefits and other economic fallout of allowing the auto companies to fail is factored in, breaking even is a lot closer at hand.

Regardless of ideology over whether the industry should have been bailed out, GM has also emerged from bankruptcy having developed a product line that is not only competitive, but also, in many instances, widely seen as superior to its Asian rivals. The new Chevy Cruze, for example, is GM's first compact car in decades for which it doesn't have to apologize or heavily discount. Its design and fuel economy performance has not only been extremely well received by the public and media, but also seems to have taken Toyota off-guard. Toyota was so sheepish in introducing its new Corolla, which has long dominated the segment, at the Detroit Auto Show last January that it had no public announcement that it was even there. Consumers are paying more than $3,000 more for the Cruze than they paid for its mediocre predecessor, the Chevy Cobalt.

The Cruze is currently under recall, but that is not expected to impact sales or GM's momentum.

"GM's sales in the first quarter of 2011 outpaced the industry average, due mostly to much improved line up of products," said Jesse Toprak, Vice President of Industry Trends and Analysis at TrueCar.com. "Even though the company spent more on incentives this year, we see this as a temporary situation as their incentives spend will decline dramatically in the coming months. GM will benefit from Japanese automakers' inventory shortages and will not need to spend extra money on incentives due to some shifting of demand from in-market consumers."

GM, along with Ford and Chrysler, has successfully held off Toyota's and Nissan's attempts to challenge Detroit in the full-size pickup category. And GM's migration to full-size crossover SUVs, away from truck-based gas guzzler SUVs, has also been successful with customers.

Still, until recently, investors have been cool to GM's stock since the company went public last November. Shares sunk from a post IPO high of $37.24 to $29.59 on April 19. But shares have rallied more than 5% since that date chiefly on GM's opportunity to pick up market share on the back of Toyota's post earthquake woes, as well as a brightening outlook in China.

Wall Street's outlook on GM has substantially brightened, with 75% of researchers following the automaker advising clients to purchase shares and 25% recommending they hold them. The median 12-month price target for GM shares by the analyst group is $43.29, compared with the May 4 close of $33.04.

The bigger question facing GM is management. Akerson has been in the CEO post since last fall, when he took over from Edward Whitacre Jr., who had been installed by the White House during GM's bankruptcy reorganization. Most of Akerson's background is in the telecommunications industry as chief financial officer of MCI and CEO of Nextel. He came to GM from private equity firm The Carlysle Group. GM recently had to change CFOs when Chris Liddell stepped down after just fifteen months. And it changed product development/design chiefs; from Bob Lutz, whose reputation is known worldwide, to relatively unknown Mary Barra.

What Akerson may lack in knowledge of the auto industry, though, he may be making up for in forcing culture change at the company. Former GM vice chairman Bob Lutz, who has recently written a book titled "Car Guys vs. Bean Counters [Portfolio/Penguin, June 2011]," says GM's finance executives would routinely dumb down designs and product benefits if they believed it was delivering "too much value to the customer."

"We have an entirely new mindset," said Akerson. "It's not to be just as good as the other guys or better than we used to be, but rather better than anyone else."