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Nice Results From GM

Importantly, the company hasn't suffered much impact from the vehicle-recall issue.
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General Motors (GM) reported better-than-expected earnings this morning, less the one-time nonrecurring charges. Importantly, the company has not seen much impact from the vehicle-recall issue (so far), and management remains cautiously optimistic about the company's sales trends through April.

We have been buying the stock on the recent weakness, as we believe, and continue to believe, that this recall issue is manageable. We feel GM's underlying fundamentals will shine through once the news headlines abate, and we believe the inflection on the financials will come in the second quarter.

At the same time, we were pleased with today's first-quarter results. Operating earnings for the quarter totaled $0.29 per share -- ahead of the consensus estimates, which had ranged from a penny to $0.10. However, the one-time nonrecurring charges brought the headline number down to just $0.06 per share. Specifically in the quarter, GM reported $1.3 billion in recall charges and $300 million in restructuring charges, but it excluded the $400 million worth of currency-devaluation charges in Venezuela.

Under the surface, North America results were the clear positive callout: Earnings before interest and taxes came to $557 million, including the $1.3 billion charge. That was ahead of the $200 million expectation, and it was driven by the company's solid product line-up and stronger pricing. Adjusted margins continue to make progress at 7.6%, which make for GM's best results since the first quarter of 1999.

Restructuring costs at the company were less than expected at $200 million, and it's possible GM will return to profitability sooner in this division than expected. We believe the momentum will continue given its K2XX truck launch and other upcoming product launches, which will enable the company to continue to post strong pricing, lower incentives and market-share gains.

GM's European results were also better than expected -- the best from that region since 2011. These results reflected a $284 million loss, but this included a $200 million charge for plant closures -- and the consensus was expecting a $500 million loss. So it looks as if the company will in fact deliver on its medium-term goals to break even in this region by mid-decade.

International results, meanwhile, were in line -- EBIT here was at $252 million. South America numbers were weaker, with a $156 million loss, but this constitutes a small percentage of total EBIT. China, with EBIT of $600 million, was also in line, but it remains the leader in share in this region.

Meanwhile, GM's balance sheet continues to strengthen. The company generated $248 million in free cash flow in the first quarter -- from autos only -- which was in line, as the first quarter is its weakest seasonally. Gross cash and marketable securities totaled $27 billion, and total liquidity stood at $37.4 billion at the end of the quarter. Net cash stood at $19.1 billion, or $11.31 per share.

Over the coming year, we expect further cash deployment in dividends and buybacks. Recall that GM reintroduced its dividend earlier this year, and that it was ahead of expectations. After today's results, we continue to have confidence that the company can achieve $5 per share in earnings power by the end of next year. All the while, the stock is priced at 2x earnings before interest, taxes, depreciation and amortization, and at 7x earnings. So the stock is very cheap, even after today's early gains.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long GM.