Weekly Industry Crib Sheet: GM and Ford Post Strong Earnings

July 29, 2013

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Second-quarter earnings were up for two of the Big Three U.S. automakers, beating expectations. Strong U.S. demand drove profits for both General Motors (GM) and Ford.

GM pulled in $1.2 billion in net income on $39.1 billion in total revenue. This is a 19 percent decline in profits over last year, when the company earned $1.5 billion in net income and $37.6 billion in revenue.

According to IndustryWeek, the loss is partially attributed to one-time items, such as the purchase of GM Korea shares, which trimmed earnings by nine cents per share. Still, GM’s revenue beat industry forecasts of $38.4 billion.

GM raised prices on new models such as the 2014 Chevrolet Silverado pickup truck and Impala sedan, which helped boost earnings from North American sales. The company expects the higher prices to further improve earnings in the second half.

Ford posted similar second-quarter income, netting $1.2 billion. This is 16.8 percent greater than Q2 2013. Revenues grew 14.4 percent to $38.1 billion.

The company saw huge gains in pickup trucks. Sales of its long-time best-selling F-Series were up 26 percent in the U.S., bolstered by construction and other businesses looking to replace aging fleets, according to the New York Daily News.

Both GM and Ford struggled with sluggish sales in Europe. GM posted a $110 million loss, while Ford lost $348 million in the region. Still, both figures are a more narrow loss than the ones suffered in the first quarter.

Ford’s income was up in Asia, where it reported its best-ever profit of $177 million. Sales in China rose 47 percent in the first six months. GM sales to the region were down 64 percent, but still ahead of Ford at $228 million.

Durable Goods Orders Continue to Rise

Durable goods orders rose 4.2 percent in June, the third sequential month of gains, according to a U.S. Dept. of Commerce report released last week.

The June gains in durable goods followed a revised 5.2 percent rise in May and a 3.5 percent rise in April. June’s figure was 1.9 percent higher than the economist-predicted figure of 2.3 percent.

The growth numbers relied on strong gains in transportation orders, which rose 12.8 percent, especially new civilian aircraft orders, which jumped 31.4 percent. Orders in machinery (up 2.4 percent) and fabricated metals (0.1 percent) were likewise positive, though electronics (down 2.6 percent), electrical equipment (down 1.8 percent), and primary metals (down 0.2 percent) shrank.

While the numbers looked positive, some economists had tepid reactions to the release. Diane Swonk, Mesirow Financial chief economist, told CNN that the rise in aircraft orders is not necessarily meaningful, as those orders “take years to fill and can later be canceled on the flip of a dime.” Additionally, military orders could “be difficult to pay for if the sequester persists.”

However, economist Jonathan Basile of Credit Suisse, told The New York Times that rising orders represented a “recipe for speedup in manufacturing and business investment” for the third quarter.

U.S. Business Loans for Equipment Rises in June

Businesses borrowed 15 percent more for investments in capital equipment in June than the previous month, according to the new report by the Equipment Leasing and Finance Association (ELFA), which also indicated that total borrowing rose 8 percent from last year.

The findings, which reflect the economic activity from 25 companies, indicate that these U.S. companies applied for 8.6 billion in leases, loans, and lines of credit for new equipment ranging from aircraft to computer systems, Reuters reported.

ELFA president and CEO William G. Sutton issued a statement based on the June findings: “Businesses continue to increase spending on capital equipment as evidenced by U.S. government statistics showing three consecutive months’ increase in durable goods orders by American firms. Our June MLFI-25 data confirms this trend: the amount of leasing and financing of business equipment and software continues to grow, while the credit quality of these transactions remains at historic highs. Member companies are optimistic that this trend will continue into the summer months and beyond.”

Meanwhile ELFA’s July Monthly Confidence Index indicates that 34.4 percent of survey respondents believe that U.S. economic conditions will improve over the next six months, up from 22.6 percent in June.

Signs Show Further Contraction in China

HSBC’s flash Purchasing Managers’ Index hit another new low in July, dropping to 47.7. The data is unsurprising given the government’s concerted effort to reign in what they are considering unsustainable growth.

Output, employment, and new orders all declined at a faster pace. The new figure means China’s economy has decelerated for nine of the past 10 quarters. While the economy still grew 7.5 percent in the second quarter, many analysts say further slowdowns could cause the country to fail to meet its 7.5 percent growth target for the year.

The flash PMI is based on 85 to 90 percent of responses. Final July numbers will be made available later this week.

During a trip to the central province of Hubei this week, Chinese President Xi Jinping said officials must uphold the spirit of reform and innovation when managing the economy in order to ensure sustainable and healthy development. Xinhua, the official news agency of China, quoted Xi as saying, “To address the series of problems and challenges facing our country's development, the key is to deepen reforms in all aspects.”

Jobless Claims Tick Up

The number of people filing for jobless claims moved up by 7,000 to a seasonally adjusted 343,000 in the week ending July 20, according to the U.S. Labor Department. Still, most economists said the increase shows little change in U.S. labor market.

Readings for jobless claims are often volatile in July, as automakers close down factories to retool. The government struggles to adjust the data for seasonal swings because of variations in the shutdown schedule each year.

The four-week moving average, which smoothes out week-to-week volatility, fell slightly to 345,250. Overall, applications are down 8 percent this year. CBS news reports that employers have added 202,000 new jobs each month on average, an increase from 183,000 in 2012.

Still, hiring will need to pick up in order to bring the unemployment rate below the 7.5 percent. Federal Reserve Chairman Ben Bernanke recently told Congress he would not begin tapering the Fed’s bond-buying stimulus until unemployment falls to 6.5 percent.

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