GM’s Profitability Climbs On Strong U.S. And Chinese Results; Europe Improves
Strong performances in the U.S. and China, along with improvements in Europe, helped General Motors (NYSE:GM) post another set of robust earnings. During the quarter, total revenues for the automaker rose 3.7% to $39.0 billion while the adjusted operating income climbed 13% to $2.6 billion. However, the automaker’s net income declined to $1.7 billion vs $1.8 billion in the previous year quarter due to a higher tax expense. GM’s total unit sales rose 5.3% compared to the third quarter of 2012. [1]
We have a $38 price estimate for General Motors, which is slightly above the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.
North America Shines
North America is the biggest market for GM in terms of the revenues generated. Unit sales in the region rose 6.5%. The North American margin expansion continued as the company posted operating margins of 9.3% for the quarter. In the second quarter, the corresponding figure stood at 8.4%. [2] The new models are resulting in higher prices and lower incentives, which are buoying the company’s profitability.
This was always going to be a big year for GM due to the sheer number of model refreshments/new introductions lined up. At the start of the year, GM had planned to introduce a total of 18 new or refreshed models during 2013. GM’s new Silverado also hit the showrooms during the third quarter. The Silverado is GM’s highest selling vehicle and accounts for a majority of the profits since the bulkier pickups generally have higher margins than compact and small cars.
Other vehicles such as the Buick Regal and the Cadillac CTS will debut in the fourth quarter. GM cited that the fourth quarter margins would decline on a sequential basis, probably due to high incentives dolled out at the end of the year, but would still climb on a year-over-year basis. The automaker has a target of achieving 10% operating margins for the North American market by the mid-decade.
European Operations Improve Again
The European improvement continued as the company’s losses narrowed to $214 million vs $487 million in the third quarter of 2012. The automaker is in the process of restructuring its operations in Europe which includes shutting down the Bochum plant in Germany by 2016. GM doesn’t expect to become profitable in the region before the mid-decade. At this rate, it looks like GM is ahead of its schedule.
In the latest quarter, GM’s unit sales in Europe rose 4.5% to 0.39 million. The fact that the automaker has been able to grow its sales is a big positive development since its Opel brand has a weak brand image in the region. But GM hopes to change that through model introductions and aggressive marketing. The automaker plans to release 23 new or refreshed models by 2016.
Automakers are also getting optimistic about the European automotive market, which is finally showing signs of bottoming out. It has grown twice in the last three months. Till last year, the market was in a free fall. This year, the rate of decline has slowed down but the market was still in the red during the first half of the year.
China Consolidation Continues
It was another quarter of strong demand for GM’s vehicles in China as the unit sales jumped 12% to 0.75 million. Last year, China overtook the U.S as the biggest market for GM, in terms of the number of units sold. China is the most important division for GM and accounts for more than 40% of the company’s valuation, as per our estimates.
GM is also hoping to cash in on the growing demand of the luxury car market in China through its Cadillac brand. Earlier in the year, the automaker got the government’s approval to build a $1.3 billion plant with a capacity to churn out 150,000 units of Cadillac cars locally. Until now, GM used to sell imported Cadillacs in China, as a result of which, the prices of its models inflated due to the high tariffs imposed on imported vehicles.
With the help of lower prices, GM is targeting a 10% market share in the Chinese luxury market by the end of the decade. That could translate to more than 250,000 units annually just from the sale of luxury cars. As the proportion of the higher priced vehicles increases, we could see some improvement in the average income earned per vehicle.
The automaker is extremely bullish on the Chinese automobile market as it targets annual unit sales of 5 million by the mid-decade, up from 2.84 million in 2012. [3] GM is pouring in a staggering $11 billion over the next few years to extend its position as the market leader in the world’s largest automotive market.
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