GM Investors Await Word on Europe Losses

As GM (GM) prepares to report fourth-quarter earnings Thursday, Europe's problems continue to plague U.S. automakers and spook their investors.

Europe's impact is being overshadowed by continuing gains in the U.S., but GM's European losses and its response to them are expected to shape the market's reception to the company's fourth-quarter report. Analysts surveyed by Thomson Reuters (TRI) expect earnings of $0.41, down from $0.52 in the same quarter a year earlier.
 

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GM continues to be plagued by weaknesses in the European market.

In midmorning trading Wednesday, GM shares were down $0.14 at $25.26. So far this year, GM shares are up 21%.

January trends in European auto sales were not encouraging. On Wednesday, Ford (F) reported that its January sales in the top 19 European markets sales declined 5% from the same month a year earlier, while industry sales in those markets fell 7.2%. On the plus side, Ford, the No. 2 brand in Europe, said its market share rose 0.2%, to 8.4%.

"The further weakening of the European industry is a concern and illustrates why decisive action is needed to restore economic stability and improve consumer confidence," said Roelant de Waard, Ford of Europe vice president for marketing, sales, and service, in a statement. "I'm pleased we're continuing to outperform the industry."

As for GM's European performance, "subsidiaries Open and Vauxhall are struggling," said analyst Tony Danova of Los Angeles market research firm IBISWorld.

"The number of European car registrations fell 1.7% last year as the entire continent is enduring financial turmoil," Danova said, in an interview. "GM's strong U.S. performance could be offset by these troubles in Europe if GM is pressured to focus on restructuring its Europe operations." GM Europe lost $292 million in the third quarter and $582 million in the first nine months of 2011.

Meanwhile, in a report issued Wednesday, UBS (UBS) analyst Colin Langan wrote that "we see potential upside to the U.S. outlook and continued downside risk in Europe.

"We remain bullish on the automakers given their leverage to North America profits, and we are more cautious on suppliers given their higher reliance on Europe," wrote Langan, who has buys on Ford and GM.

In a report issued Tuesday, Deutsche Bank (DB) analyst Rod Lache wrote that "GM's problems in Europe are not easily fixable, largely because the issues appear to be more related to price than cost. GM is certainly not alone in facing this problem. And short of a broad industry restructuring, pricing will be difficult to improve."

"The potential exists for deterioration in Europe to derail the investment thesis," Lache wrote. But he said "near-term earnings deterioration may not be as bad as feared" despite a recent series of disheartening media reports, given GM's reduced costs and strength in North America. He has a target price of $31 on the shares.

As for Ford, the company missed fourth-quarter estimates last month as losses in Europe and Asia, combined with reduced profit in South America, outweighed gains in the United States. In Europe, the company reported a pretax operating loss of $190 million, compared with a loss of $51 million a year earlier, due largely to higher material costs.

In midmorning trading on Wednesday, Ford shares were down 2 cents, to $12.45. For the year, Ford shares are up 12%.

In the U.K., Ford's largest market in Europe, Ford new car registrations in January declined by 600 units, or 2.5%, to 23,700 units, with market share down 0.2 percentage points, to 16.1%. In Germany, Ford's second-largest European market, January sales fell 1%, in line with the industry, to 17,000 units while market share was flat at 7.3%. In Italy, Ford's third-largest Europe market, new vehicle registrations fell 23%, to 16,000 units.

In Ford's total 51 European markets, January sales fell 4.3% to 108,600 vehicles.