Earnings Preview: GM Set To Report Higher Profits On The Back Of Accelerating SUV, Cadillac Sales
General Motors (NYSE:GM) is scheduled to announce its Q1 FY15 earnings on April 23. In the fourth quarter of FY14, the company showed improved core performance metrics due to strong sales in China and the U.S. but high recall and restructuring costs meant that the company reported a loss on an earnings per share basis. The company’s reported EPS for the full year fell by 33% despite a modest revenue increase. [1]
In the first 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 including Cadillac. 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 through the first three months 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. Below, we take a look at these factors in more detail.
We have a $40 price estimate for General Motors, which is about 10% more than the current market price.
North American Margins Set To Rise
North America accounts for about 35% of the company’s unit sales. In the first quarter, GM North America’s (GMNA) profits should rise considerably as the division sold twice as many Chevrolet Suburbans and Cadillac Escalades as compared the first quarter of 2014. [2] The auto maker is targeting an increase in margins of close to 10% by 2016 from the region’s operations 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. GM is also benefiting from the low supply of Ford F-150 pickups in the commercial trucks market in the U.S. While commercial sales of pickup trucks bring in lower margins than retail sales, they are profitable in their own right and should also contribute to the increased margins.
Continuing from the previous two quarters, we expect the uptrend in retail sales 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, since November 2014, the number of GM vehicles available at auctions has declined considerably. [3] 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 2014, the North American operating margins rose on the back of new models from the Chevrolet and Buick brands increasing their retail market shares in North America. [4]
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 2014, the company’s subsidiary Opel Vauxhall showed continued strength in the region, with sales increasing by roughly 4-5% and market share increasing in 12 countries on a year-over-year basis.
Even though GM’s overall market share in the region is down to 6.3% 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 12% for the fourth quarter (year-over-year comparison) and its share of the world’s biggest auto market stood at 14.8% for the quarter, up 0.6 percentage points from a year ago. [5] GM’s market share is due to the growth in the company’s Cadillac, Buick, and Wuling brands. Global Cadillac sales in 2014 increased 5% on the back of a 47% increase in China, bringing the cumulative sales growth of the brand to 35% since 2012. Chevrolet also achieved a record sales figure as volumes of the new Trax crossover gathered 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. [6]
While previously, GM was targeting a higher market share in the Chinese auto market by using lower prices, it is now trying to improve its profitability by increasing the sales of SUVs and Cadillacs. 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.
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More Trefis Research
- GM Reports Q4 2014 Net Income of $1.1 Billion, GM, February 2015 [↩]
- Pickups and Crossovers Drive Best Chevrolet and GMC Truck Sales in March since 2007, GM media, April 2015 [↩]
- Where are the GM program vehicles?, Automotive News, December 2014 [↩]
- GM 10-Q [↩]
- GM 10-K, SEC [↩]
- China And Other Emerging Markets To Drive SUV Demand, China Economic Review, February 2014 [↩]