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|S&P 500||-8.96 to 1,969.95|
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|Gold||-$3.10 to $1,300.20|
|Crude Oil||-$0.79 to $100.88|
Mike Larson, Money and Markets columnist and editor of the Safe Money Report, is out today. Mark Najarian, the managing editor of Money and Markets, is filling in …
If you’d been living on another planet the past couple of years, you probably wouldn’t be surprised that the U.S. and Russia are involved in a war of words, or that there doesn’t seem to be any peace in sight in the Middle East, or by the recent technological and Internet advances.
But what might have shocked you is the relative health of the U.S. automobile industry. A few years ago, General Motors was forced to take a government bailout to avoid bankruptcy. Ford Motor Co. just barely was able to fight off collapse without taking public money. And Chrysler filed for Chapter 11 and went through a series of owners until Italy’s Fiat took over.
Now to the present. … GM and Ford recently reported second-quarter earnings. While they weren’t spectacular, after having a few days to dig deeper into the data, analysts are seeing the numbers as evidence that the companies appear to be on a solid road to full recovery.
(DISCLOSURE: The author has a small personal holding in Ford shares and has had for more than 20 years.)
Ford in its second-quarter earnings posted a 6 percent rise in net profit to $1.3 billion, or 32 cents a share, up from 30 cents a share in the year-ago period. Excluding some “separation” costs in Europe (mainly layoffs in the U.K. and Greece) and a charge for its unprofitable venture in Russia, it made 40 cents a share, beating the 36 cents forecast by analysts.
|Stripping out costs related to recalls, GM’s second-quarter earnings met analyst expectations.|
But, in a good sign for its biggest market, Ford said it had a record pretax profit of $2.4 billion in North America. It actually had lower vehicle sales, but lower materials prices and increased parts and accessories sales helped boost the results. Its operating margin in North America rose to 11.6 percent from 10.6 percent a year earlier.
And in an encouraging sign for future growth, it reported strong sales in China. Overall in Asia, its earnings rose 22 percent to $159 million. Not massive but a good rise given the massive potential in the region.
At GM, on the surface, at least, the numbers might sound troubling. It said second-quarter profit fell 85 percent to $190 million. But it also said that costs related to recalls — nearly 30 million vehicles — cut $1.5 billion from the profit number.
“Dig deeper into the data, analysts are seeing the numbers as evidence that the companies appear to be on a solid road to full recovery.”
GM said it’s confident those costs will drop to more normal levels going forward. Of course, there have been comments from the company in that vein previously only to later announce more recalls, so caution is key here. Still, without one-time items, GM would have had earnings per share of 58 cents, meeting analyst expectations.
The “underlying strength of GM is quite amazing,” Michelle Krebs, senior auto industry analyst at autotrader.com, told Bloomberg TV. “GM would’ve had an outstanding quarter if not for the recall costs.” She added that consumers were not being frightened off by the media reports of recalls and are still buying GM products.
Mandeep Singh Rai, a senior analyst at Weiss Research, agreed that the U.S. auto industry appears to be on a sustainable uptrend.
“Auto sales have been rising,” he noted. “The automakers have been able to turn around as aging cars — which are less efficient and don’t have updated technologies — are being traded in for newer, more efficient models with better fuel economy and those that are less in need of repairs, as well as cars that have satellite radio, Bluetooth and other higher-tech offerings.
“On the heels of those favorable tailwinds,” he added, “as well as a bankruptcy wakeup call for GM and Chrysler, and low interest rates for buyers, Detroit has been able to repay government money, increase sales, run leaner as a product of cost-cutting efforts, and increase margins and profitability. And, for Ford and GM, distributions have been reinstated — allowing for shareholders to have sizable returns from capital appreciation and dividends.”
To be sure, there are risks going forward — the strength of the U.S. and global economic recovery, the speed of interest-rate rises, the bad will created by recalls, etc. So nothing is certain going forward.
All this brings us to the question of whether the policy of bailing out the auto industry was the right one. GM has repaid the government and now is on its own; Chrysler, now under the arm of Fiat and called Chrysler Fiat Automobiles, has recovered from its near-collapse and could be headed to a U.S. stock-market listing, although it, too, has been hit recently by large recalls; Ford narrowly avoided taking government money but benefited from the implied government promise to help the industry.
What’s your view? Looking back, should the government have stuck to a strict interpretation of capitalism and let the automakers go bust? Or do you see the U.S. industry, and all the jobs it provides, as too big to fail? Would you invest in the automakers or a Chrysler Fiat IPO? Let us know your views by putting your comments here.
|OTHER DEVELOPMENTS OF THE DAY|
Pay up: A study out today shows that more than one-third of Americans are delinquent on their debt. The Urban Institute, which studied the credit files of 7 million Americans, said that 35 percent of them have debt in the collection process. A debt normally goes into collection after 180 days of nonpayment. Taking the averages out to the full population, it would mean that 77 million Americans have debt in collections, owing $5,200 each.
Big Pharma’s big day: Pfizer Inc. (PFE, Weiss Ratings: A-), known as the maker of Viagra, said second-quarter earnings tumbled 79 percent, but the results beat analyst expectations. The recent quarter was hurt by a strong year-ago comparison, when the drug maker booked a one-time gain of $10 billion from a business spinoff. Pfizer said it made $2.91 billion, or 45 cents a share, in the recent quarter, down from $14.1 billion, or $1.98 a share, a year earlier. Revenue fell 2 percent to $12.77 billion. Sales of erectile dysfunction pill Viagra fell 28 percent outside the U.S. as the drug lost some of its patent protection.
Meanwhile, Merck & Co. Inc. (MRK, Weiss Ratings: B) said that its earnings more than doubled in the quarter, also beating analyst expectations. Net profit rose to $2 billion, or 68 cents a share, from $906 million, or 30 cents a share, in the same quarter a year earlier. Sales declined, but the company’s efforts to cut jobs and slash costs helped boost the bottom line.
Banking on Europe: Germany’s largest bank, Deutsche Bank AG (DB, Weiss Ratings: C-), said restructuring efforts are paying off, allowing it to post strong second-quarter results. It said pretax profit rose 16 percent to $1.2 billion, safely beating analyst expectations. Analysts cited strong investment banking results. Risks at the bank include potential fines related to regulatory investigations associated with high-frequency trading and other issues. The bank said it is cooperating with officials in the probes.
Check back tomorrow for our editors’ reactions to the GDP figures coming out premarket. Remember, you can comment on these stories or any others by clicking here.
P.S. On June 25, our Top Stocks Under $10 team saw the potential for renewed growth in China and picked out a stock that had been lagging the market. Since then, the stock is up more than 35 percent. To learn more about the Top Stocks Under $10 service, click here.
(Mike Larson’s regular afternoon column will return Friday.)