Earnings Preview: Strength In US and China Should Keep GM’s Topline Growing
General Motors (NYSE:GM) is scheduled to announce its Q3 FY14 earnings on October 23. In the second quarter, GM’s earnings were down on account of high expenses related to car recalls but strong core performance meant that the company’s revenues were slightly higher compared to last year. Net Revenue for the quarter came in at $39.6 billion, slightly higher than the same figure in the previous year’s second quarter. The increase of $600 million was attributable to the effects of a favorable sales mix, higher average pricing and increased revenue from GM’s Financial Division, which was partially offset by lower wholesale volumes and the negative impact of the translation of the Brazilian Real and Argentinian Peso to the U.S. dollar. [1] In our note below, we take a look at the numbers we will be watching out for in the latest earnings report.
We have a $40 price estimate for General Motors, which is about 30% more than the current market price.
North American Operations Steady
North America accounts for about 35% of the company’s unit sales. In the second quarter, GM North America’s (GMNA) revenues came in $2.2 billion higher at $25.7 billion compared to the second quarter of fiscal 2013. [1] This increase of close to 10% was driven primarily by higher average unit prices in the region. The company’s market share in the continent stood at 17.2%, flat versus the market share in last year’s second quarter but up 0.9% from the first quarter, with a 17.9% share in the U.S. [1] Excluding the impact of recall expenses, GMNA’s operating margin was above 9% for the quarter and up 1.15% for the first six months of the year compared to the same period in the previous fiscal year.
With a number of new or refreshed model launches throughout the year, margins as well as unit sales should continue to remain strong. Furthermore, a slew of model refreshments under the Chevrolet and Cadillac brands have pushed up the average pricing and helped GM realize higher margins. Through the four quarters of 2013, the North American operating margins rose 60 basis points to 7.8%, spurred by the Chevrolet, Buick, Cadillac and GMC, with all increasing their retail market shares in North America. [2]
European Operations Could Improve
Europe has been a worry not only for GM but for a number of other automakers as well. The European automotive market was in a free fall till 2012. The market was in red till the first half of 2013, but things improved in the second half of the year. Now with the market rising, there is once again a renewed optimism about Europe. GM plans to release 23 new or refreshed models by 2016 and hopes to become profitable in the region by the mid-decade.
In the second quarter, GM’s European operations were unprofitable as expected due to restructuring related expenses. However, the company’s subsidiary Opel Vauxhall showed continued strength in the region, with sales increasing 4% and market share increasing by 0.08% year-to-date. [1] Even though GM’s overall market share in the region is down to 6.8% due to the shutdown of Chevrolet’s European operations, its overall market position in Europe is improving and this effect can be directly attributed to Opel Mokka and Insignia, the company’s new flagship brand. The company is planning to undertake investment well in excess of $5 billion over the next few years in order to develop 27 new cars and 17 new engines under the Opel brand, which will start offering budget cars for the first time under its nameplate. [3] GM’s market share in the European car market has shrunk from 10.4% in 2008 to 6.8% in the present quarter, a major decline when you factor in the 23% decline in the market size over the same period. The U.S. based auto maker is trying to restructure its European operations in order to return to profitability by 2016 and aims to reach a 5% operating margin by 2022.
Chinese Sales Should Remain Strong
China is GM’s largest automarket and accounts for over 35% of the company’s unit sales. GM’s sales in China were up 8% in the second quarter and the net income margin improved by 0.6% to reach 10% for the quarter. [1] The automaker’s share of the world’s biggest auto market stood at 14.4% for the quarter, flat versus the share in the same quarter last year. [1] GM’s market share is due to the growth in the company’s Cadillac, Buick and Wuling brands. The company also expects the sales growth rate of Chevrolet to catch pace in the future as sales of the new Trax crossover gather steam. Crossover and SUV demand in China is expected to grow at about a 10% annual rate and reach about 7 million units by 2020. [4]
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. If the proportion of higher priced vehicles rises, we could see a healthy increase in the average equity income earned per vehicle. Volkswagen overtook GM as the largest automaker in China in 2013, but GM is working to regain its position as the market leader in the country. The automaker has plans of building five more plants in 2014, in an effort to increase its manufacturing capacity by 65% by 2020. GM expects its China sales to grow by 8-10% this year, in line with the overall growth of the Chinese market. [5]
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- General Motors’ CEO Discusses Q2 2014 Results Earnings Call Transcript, Seeking Alpha, July 2014 [↩] [↩] [↩] [↩] [↩] [↩]
- GM 10-Q [↩]
- GM Pulls Chevy From Europe After Decade as Opel Expands, Bloomberg, December 2013 [↩]
- China And Other Emerging Markets To Drive SUV Demand, China Economic Review, February 2014 [↩]
- GM To Battle Volkswagen In China with $12 Billion Investment, Reuters, April 2014 [↩]