Earnings Review: Record Profits in North America, Record Sales in China Keep Strong 2015 Going For GM

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General Motors (NYSE:GM) announced its results for the third quarter of fiscal year 2015 on October 21. The company reported earnings of $0.84 per share, a slight improvement over last year’s $0.81. [1], and revenue of $38.8 billion. Rising sales of full-size pickups and SUVs drove record margins in North America, while record volume sales in China led to an increase in pre-tax profit margin. Below, we take a look at the company’s performance in each geography in more detail.

We have a $41 price estimate for General Motors, which is about 15% more than the current market price.

New Records In North America

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GM had a longstanding target of achieving an EBIT-adjusted margin of 10% by 2016 but it seems as if the company will achieve that target one year ahead of time. [2] In the third quarter, GM’s efforts at improving profitability showed results on a number of fronts as the company made $3.3 billion in North America before taxes and posted an pre-tax earnings margin of 11.8%. [3] On a year-to-date basis, the company made $8.3 billion in EBIT-adjusted at a margin of 10.5%. [3] In the fourth quarter, the company is likely to face higher costs due to new product launches, lower production due to holidays and product changeovers, which are usually achieved through clearance sales of old models often at generous discounts. However, the company still expects to achieve the 10% margin figure for the year 2015. [4]

Three major trends have driven profitability in North America:

1) GM’s retail market share in the U.S. has grown from 15.6% in 2014 to 16.5% by the end of the third quarter. Retail sales are more profitable than wholesale and rental sales, thus leading to higher overall margins. [4]

2) GM’s share in the full-size and mid-size pickup segments is increasing. Both of these segments are highly profitable and fast growing so the company’s lead here results in higher profits.

3) GM’s trucks have fared extremely well this year as inventories from Ford for the F-150 series of trucks, a traditional leader in this segment, have been low. The company is redesigning its Chevrolet Silverado and GMC Sierra trucks for 2016 and will add new features to those trucks like lane driving assistance, forward collision alert systems and support for both Apple CarPlay and Android Auto. This should help the company sustain its sales momentum in 2016. [4]

China Slowdown On the Horizon, Europe Weakness Continues

GM is trying to restructure its business in Europe. The company management hopes European operations will return to profitability next year. In the quarter, the company’s losses in the region narrowed to $200 million compared to $400 million in the same quarter last year. [3] Overall, GM’s market share in Europe has declined by 70 basis points since the beginning of the year due to wind down of operations in Russia as well as the withdrawal of the Chevrolet brand from several markets. However, the company launched its all new Opel Astra this quarter to 30,000 pre-sell orders. The vehicle is a segment leader as far as safety technologies and connectivity is concerned and should help the company gain some ground over the coming quarters. [4]

GM’s China unit earned $500 million in equity income for the quarter, increasing its net income margin to 9.8%. [4] So far this year, GM’s sales have remained at record levels for the region. Over the quarter, the company passed the 2.5 million units mark, driven by higher sales of SUVs, Cadillacs and MPVs. SUV sales have climbed by as much 171% so far this year in China, driven by the Baojun 560, a low cost SUV produced in collaboration with joint venture operator Baojun, and the Buick Envision. [4] Chevrolet sales have risen by just over 12% so far this year. [4]

GM is the second highest international seller of vehicles in China, behind Volkswagen. The company was looking to shift its strategy from trying to sell more vehicles to trying to generate higher profits from the region this year. The U.S. based auto maker has been trying to grow the sales of crossovers, SUVs, and Cadillacs in the region. However, as a result of both increasing penetration, slowing economic growth and after-effects of the July stock market crash, the company has revised its expectations of growth from the region. Company management expects industry wide sales to grow somewhere between 3% to 5% for the next few years. [4] However, much of this growth is expected to come from tier 2 to tier 4 cities, which form 85% of GM’s sales volume in the country. [4] Considering, this we expect GM China to continue to post strong results in the coming quarters.

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Notes:
  1. GM 10-Q SEC Filing, GM Investor Relations []
  2. General Motors (GM) Mary Teresa Barra on Q3 2015 Results – Earnings Call Transcript, Seeking Alpha, October 2015 []
  3. Ref: 1 [] [] []
  4. Ref: 2 [] [] [] [] [] [] [] [] []