Earnings Preview: GM Poised To Deliver Another Strong Set of Results
General Motors (NYSE:GM) is scheduled to announce its Q4 FY14 earnings on February 4. In the third quarter, the company managed to earn $1.4 billion, up from $0.7 billion in October 2013, on the back of strong performance of the newly introduced models in China. 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%. [1]
In the fourth quarter, we expect the company to continue its strong momentum. The revenue from GM North America should increase on the back of increased sales of all GM brands except Cadillac in 2014. Additionally, average transaction prices should rise due to better management of fleet inventory and the introduction of new models. GM’s China momentum also continued to be strong towards the end of the year and the company finally seems to have come up with a plan that could make it profitable once again in Europe. (GM Management Confident Of Returning To Profitability In Europe Soon, Trefis, January 2015) Some of the gains made in these areas might be offset by the negative impact of currency valuations and costs related to the recall of faulty models. Below, we take a look at these factors in more detail.
We have a $40 price estimate for General Motors, which is about 20% more than the current market price.
North American Operations Steady
North America accounts for about 35% of the company’s unit sales. In the third quarter, 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 an 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.
In the fourth quarter, we expect the same trends to continue due to the effects of better management of retail fleets and the introduction of new models. When vehicles are retired from rental fleets, they are sold on the used car market in auctions. The price that a car company fetches for these vehicles depends quite a lot on their supply. An oversupplied market means that the average transaction price for a retired-from-rental-fleet model is usually quite low. Due to poor management of its fleet business, GM did not do very well in this area. However, in November, the number of GM vehicles available at auctions was as low as 70 compared to about 800 in October. [2] By temporarily cutting sales of these retired fleet vehicles, GM will be able to restrict the supply of these vehicles into the used car market. If the company had not done so, consumers would have been able to buy these cars from dealerships which bought these cars cheaply at these auctions.
With a number of new or refreshed model launches throughout the year, margins as well as unit sales continued 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 on the back of new models from the Chevrolet, Buick, and Cadillac brands, with all increasing their retail market shares in North America. [3]
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 the 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 third quarter, 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. 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. 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 auto market and accounts for over 35% of the company’s unit sales. GM’s sales in China were up 14% for the last 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. [4] GM’s market share growth is due to 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. [5]
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. GM expects its China sales to grow by 8-10% this year, in line with the overall growth of the Chinese market. [6]
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- GM 10-Q [↩]
- Where are the GM program vehicles?, Automotive News, December 2014 [↩]
- GM 10-Q [↩]
- General Motors’ CEO Discusses Q3 2014 Results Earnings Call Transcript, Seeking Alpha, October 2014 [↩]
- 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 [↩]