Earnings Review: Strong Performance In U.S., China Improves GM’s Profitability
General Motors (NYSE:GM) released its third quarter results before market opening on Thursday, October 24. The company managed to earn $1.4 billion over the quarter, up from $0.7 billion in October 2013, on the back of strong performance of the newly introduced models in China and the U.S. Net Revenue for the quarter was up slightly at $39.3 billion, from the $39 billion a year ago. The increase of $300 million was attributable to the effects of a favorable sales mix, higher average pricing and increased revenue from GM’s Financial Division, partially offset by lower wholesale volumes and the negative impact of currency translations. [1] Car sales were up in the U.S. and China, the two biggest and most profitable markets for the company. However, weak performance in the under performing markets of Russia and Brazil meant that the company’s global market share fell by a tenth of a percentage point to 11.5%. [2]
We have a $40 price estimate for General Motors, which is about 30% more than the current market price. We are in the process of revising our estimates in order to incorporate the latest earnings.
North American Sales Strong
GM North America’s (GMNA) revenues came in $2.3 billion higher at $25.8 billion compared to the third quarter of fiscal 2013. ((GM 10-Q)) This increase of close to 10% was driven primarily by higher average unit prices in the region and increase in wholesale volumes, driven primarily by full-size pickups and full-size SUVs. The company’s market share in the continent stood at 16.8%, up 0.1% from the market share last year. ((General Motors’ CEO Discusses Q3 2014 Results Earnings Call Transcript, Seeking Alpha, October 2014)) GMNA’s EBIT-adjusted margin was close to 9.5% for the quarter and up 20 basis points compared to a year ago.
Newly introduced pickup and SUV models were able to boost both transaction prices and margins for GM in the continent. However, Cadillac, the company’s luxury brand, continued to struggle despite the introduction of new models and a booming luxury market. Sales for Cadillac were down by 8% and incentives increased to 13%, the highest since 2007, over the quarter. This is bad news for the company as the success of Cadillac is highly critical to its attempts to increase overall profitability.
European Restructuring Underway
GM’s European operations were unprofitable as expected due to restructuring related expenses and weak volumes in Russia. However, the company’s subsidiary Opel Vauxhall showed continued strength in the region, with sales increasing 4% and market share increasing in 12 countries on a year-over-year basis. On an EBIT-adjusted basis, the company registered losses of $400 million over the quarter in the region. Revenue declined to $5.2 billion compared to $5.37 billion on a year-over-year basis due to unfavorable currency translation effects primarily driven by Russia.
Even though GM’s overall market share in the region is down to 6.5% 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 6.5% 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.
Record Sales in China
GM’s sales in China were up 14% for the quarter and its share of the world’s biggest auto market stood at 15.2% for the quarter, up 0.8% from a year ago. ((General Motors’ CEO Discusses Q3 2014 Results Earnings Call Transcript, Seeking Alpha, October 2014)) 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]
GM is now looking at the luxury car segment in China, since it already has a significant presence in the mainstream car segment. Last year, GM got the government’s approval to build a $1.3 billion plant with a capacity to produce 150,000 units of Cadillac cars locally. With more competitive pricing, GM is targeting a 10% market share in the Chinese luxury market by the end of the decade. As the proportion of the higher priced vehicles increases, average income earned per vehicle could rise even further.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
Notes:- General Motors’ CEO Discusses Q3 2014 Results Earnings Call Transcript, Seeking Alpha, October 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 [↩]