·  Legal News, Analysis, & Commentary


Despite Scandal GM Posted Better-than-expected Profits

— October 26, 2015

General Motors seems to have weathered the worst of its ignition switch scandal, at least in investor’s eyes. Despite deep losses in other countries and huge fines at home, the automaker posted better-than-expected quarter three results. CEO Mary T. Barra says the company isn’t completely clear yet, though.

While it wasn’t a banner day for General Motors in Washington D.C., it was another story on Wall Street. Despite deep losses overseas and huge penalties at home, GM posted better-than-expected profits.

Investors got a pleasant surprise as the automaker’s stock closed up about 6% on the 21st at $35.42. Meanwhile, victims of the GM ignition switch debacle were present at a congressional hearing pushing for legislative reform in auto safety. The ignition scandal alone led to 2.6M cars being recalled in 2014 as well as 124 deaths.

Almost half of GM’s third quarter earnings – 66 cents per share out of $1.50 – went to pay DOJ fines totaling and civil lawsuits totaling $1.5B.

The ignition switches in Chevy Cobalts were analyzed by Mark Hood, who found that the switches had been changed in 2006 or early 2007. The changes not only created a mega-scandal but also drove GM’s quarter three profits to 84 cents per share, almost flat compared to last year. Yet, investors seem to be treating the scandal as water under the bridge and are more interested in the company’s core performance. Based on those criteria alone, investors are calling Q3 a success.

According to Colin Langan, equity analyst at UBS, “I think people for the most part are looking past it [the scandal] now. Especially with the D.O.J. fine settled, it’s more about how the business is performing than what the next shoe is that’s going to drop.”

Interestingly, GM’s Q3 success was found almost totally in North America. The company posted about 12% operating profit margin on $3.3B of pre-tax operating income, which is up from roughly $2.5B last year. Things were all right for GM in China too, with better-than-expected results in that difficult market. While volume sold in China fell, GM had $500M equity income with a 9.8% net income margin.

Mr. Langan said, “China was a good data point for them. It showed they could deliver even in a tough environment.”

However, things became grim for GM in Europe and South America. The auto giant took a $231M loss in Europe, better than the $387M loss it had there last year. The loss in South America was $217M, much more than the $32M reported loss from last year in that market.


Mary T. Barra, GM’s CEO, offered cautious advice on Wednesday, saying that the automaker wasn’t done dealing with the fallout from the safety crisis. Analysts present asked Ms. Barra when the company would buy back more stock and were told that such a decision would come no sooner than 2016 as it needed more time to understand its total recall-related expenses.

In a conference call, Ms. Barra added, “We did extinguish some risks but still have a handful of open items,” such as continuing investigations by the SEC, the FTC and many state Attorneys General.


G.M. Earnings Beat Estimates, but Ignition Switch Scandal Takes Toll

Join the conversation!