GM Chevy Truck 2012
A Chevy truck. Reuters

General Motors Co. (NYSE:GM) is expected to post an approximately 40 percent drop in profits for the first three months of 2013 compared with the same period last year as worsening conditions in the European market offset robust U.S. demand, especially for trucks, and the benefits of GM’s large footprint in China, the world’s fastest growing consumer auto market.

North America’s biggest automaker, whose top shareholder is the U.S. federal government, will release its first-quarter earnings statement on Thursday before U.S. stock markets open.

On average, analysts polled by Thomson Reuters expect GM to report net income of $903 million, or 54 cents per share, compared with $1.52 billion, or 93 cents per share, in the same period last year when the company had its second best year since its 2009 bankruptcy. Revenue is expected to be down 3.1 percent to $36.6 billion, but the company has managed to increase its gross margin, which contributed to a rise in earnings.

Analysts have cooled a bit on GM’s prospects. The average revision to EPS in the past 30 days is down about two cents. Much of that reflects the continuing sales implosion that carmakers, GM included, are experiencing in Europe. GM does not expect its European operations to be profitable until the middle of this decade, according to a Feb. 28 note by Trefis, which described expectations that GM's European operations could be profitable by 2015 "highly optimistic" and "difficult to achieve."

European sales plunged 8.5 percent to 918,280 vehicles in January -- the lowest level in the last 23 years -- and similar declines were posted in the following two months. Vehicle registrations started the first quarter down 5.2 percent. For the entire first quarter, GM's European sales fell more than 10 percent. Further, Germany, the continent's No. 1 economy, is also showing signs of slowing growth, which could delay success for GM's turnaround efforts in Europe.

Last year, GM lost $1.8 billion, and Trefis analysts forecast this year's losses at more than $2 billion.

Aside from the dismal prospects in Europe, analysts are optimistic about the trajectory of GM's overall profit for the rest of 2013, three years after U.S. taxpayers bailed out the company. Analysts expect GM’s EPS to rise by as much as 20 percent over the course of this year as Americans are on track to outmatch 2012’s robust rise in vehicle purchases.

“We know that the truck market has been strong," said Alec Gutierrez, a senior market analyst at automotive valuation company Kelley Blue Book. "It helped Ford to see the strongest North American profits they’ve seen in a decade. GM is seeing much of the same. I would look for strong performance from GM in terms of earnings.”

GM’s sales are up about 9 percent in the first quarter, but the amount of money spent on incentives to buy -- a key metric for gauging automakers’ performance is how much they lose in their efforts to get customers to buy their cars -- grew by about that same amount, according to auto intelligence provider

“They basically have to incentivize a lot of their [U.S.] sales right now to keep their momentum going,” said Jesse Toprak, a senior analyst for auto intelligence provider “It’s a mixed bag of numbers. Normally you want to see both sales and transaction numbers up, like in Ford’s case where their sales are up and their transaction prices are up. In GM’s case, sales are up but they had to buy some of those sales. At the end of the day, GM’s market share grew, so it’s not all bad, but the incentive part needs to be checked more for GM this year.”

April’s incentive spending for GM is expected by TrueCar to come in at the top of the list at an average of $3,390 per sale, up 7.1 percent from April of last year and considerably higher than the average of the top eight global automakers ($2,466 for April 2013). The company has managed to bring down this expense by about 8 percent from March, but it still has a way to go before it falls in line with the average.

Still, sales of GM’s most popular vehicle, the Chevrolet Silverado pickup, was up 20 percent in the first quarter, and the company’s luxury Cadillac brand continues to post robust sales. Truck and luxury sedans like the new Cadillac XTS are the most profitable, so continue to watch for strong performance in these two segments to help gauge GM’s U.S. performance. GM’s U.S. retail sales climbed 24 percent in January, 7 percent in February and 4 percent in March.

In terms of GM’s global performance in the first quarter, good news came from China, the world's largest auto market, is offsetting issues the company -- along with most other automakers – has with the European market, which are expected to continue to weigh heavily on all auto sales at least through 2013, with some easing forecast for next year.

“We believe GM is well positioned to benefit from higher demand in emerging markets such as China, but European results should lag,” said S&P analysts Efraim Levy in a research note.

GM announced that it sold its millionth vehicle in China on April 22, the earliest it has ever achieved this benchmark in a calendar year since it first crossed that sales threshold in December 2007. The company is planning to expand its already considerable footprint in China this year with 17 new models, including the Chevrolet Cruze hatchback, two new Jeifang trucks and the Astra GTC from the company’s European-based Opel brand. GM plans to expand the number of dealers selling its vehicles in China by 400 outlets by the end of the year, bringing the total to 4,200.

The company has 12 joint ventures in China including its relationship with China’s largest carmaker, SAIC Motor Corporation Limited, and with Wuling Motors Co. Ltd. and FAW Group. GM announced at the Shanghai auto show this month that it’s investing $11 billion by 2016 in China, more than the $8.5 billion it has invested in the U.S. since its 2009 bankruptcy, according to Bloomberg. The move is significant considering China’s expected growth and a clear sign that the future of the auto industry could see a profound shift to Asia, centered on the Chinese consumer.

India sales have declined, but GM’s exposure to the continent is relatively light; sales declined 14 percent in March to 9,006 units.

That downturn is more than offset by growth in Southeast Asia, especially in Thailand, where the Chevrolet posted record sales in the first quarter. GM is currently expanding its dealerships in Thailand and Indonesia as incomes in these two countries continue to rise.

Despite the tumult in Europe, the company has said it’s committed to riding out the storm in hopes of a rebound that could begin next year if some of the more optimistic expectations wind up being prescient.

Earlier this month the company said it will invest €4 billion ($5.2 billion) through 2016, mostly in Germany, to develop the Opel brand. GM's balance sheet has improved, but it still faces unfunded pension obligations and was still 16.4 percent owned by the U.S. government entering the quarter -- and it will likely be under that yoke through the first quarter of 2014.

On the bright side for GM is a basic fundamental: People are buying GM cars in increasing numbers in the U.S. and in Asia. And that’s basically good for its bottom line.