Earnings Review: GM Posts 17% Profit Gains On The Back Of Strong U.S., China Performance

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General Motors (NYSE:GM) announced its results for the fourth quarter and full year for fiscal year 2015 on February 3rd. The company reported a diluted earnings of $5.91 per share, a massive improvement over last year’s $1.65, and revenue of $146 billion. [1] Strong sales of pickups, crossovers and SUVs drove record profits in North America, while increased market share in China led to an improved equity income from the region. 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 40% more than the current market price.

New Records In North America

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GM’s market share in North America declined in 2015 despite a 20 basis point increase in its market share in Canada and Mexico. [2] The company sold 3.6 million vehicles in the region for the full year, a 6% increase over 2014’s 3.4 million units. In the U.S., the company sold just over 3 million units, around 700,000 units more than in 2014. Owing to a higher contribution of SUVs, crossovers and pickups in the sales mix and cost-cutting measures, the company earned $2.8 billion from the region in the fourth quarter. This led GM’s pre-tax income to $11 billion for the full year, a 67% increase over last year’s $6.6 billion. Sales of GM’s full-size pickups increase by close to 10% on a year-over-year basis in the final quarter of the year, with sales of crossover SUVs Chevrolet Equinox and Traverse outpacing industry wide gains. [3]

The main trend driving GM’s operational strategy in the region was its efforts to reduce its proportion of fleet sales versus retail sales in the region. While previously the company made a high number of fleet sales, margins on those sales was very thin and that affected overall profitability. Over the full year, the company reduced its share of fleet sales as a percentage of overall retail sales to 18.1% compared to 19.2% in 2014. [2] Additionally, within fleet customers, there are commercial, Government and rental fleet buyers. The last tend to purchase vehicles on bulk and then dump the entire fleet in a couple of years on the used car market. A surfeit of GM vehicles on the used car market affect the prices GM’s vehicles are able to command, not just in the used car market but also on new vehicles, as relatively new used cars can compete for sales with new models. Additionally, low prices for used cars drive up the interest rate the company has to charge on its lease sales, which is an important channel for luxury vehicle sales, and thus drive down sales. GM has put in considerable effort in trying to control the supply of its vehicles to fleet buyers and it looks like these efforts are paying dividends.

GM Overcomes China Slowdown

GM’s China unit earned $579 million in equity income for the quarter, up slightly from last year’s $516 million, with profits up to $408 million from $396 million in the previous year. [2] GM increased its market share in the region by 20 basis points to 14.9% for the full year. The company’s sales grew at a pace of 5.4% for the full year driven by strong sales of the low cost Baojun SUV and the premium Buick Envision, even as the industry growth rate slowed down to just over 4% compared to 9% from the previous year. [4] In 2015, GM also overtook German competitor Volkswagen as the leader in terms of unit sales. In 2016, GM should continue to maintain its lead over Volkswagen as most of the new sales in the region are expected to come from tier 2, tier 3 and tier 4 cities, where China designed small cars like Chevrolet Sail should help it continue to post gains.

Before the slowdown in the Chinese economy, GM was trying to shift its strategy from selling more vehicles to generating higher profits from the region. The U.S. based auto maker has been trying to grow the sales of higher margin vehicles like crossovers, SUVs, and Cadillacs in the region. Following the stock market crash and looming fears of an economic collapse, the company’s management revised industry wide sales to grow somewhere between 3% to 5% for the next few years. Still the good news is that 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. Considering, this we expect GM China to continue to post strong results in the coming quarters.

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Notes:
  1. GM Q4 2015 Earnings Release, GM Investor Relations []
  2. Ref: 1 [] [] []
  3. General Motors (GM) Mary Teresa Barra on Q4 2015 Results – Earnings Call Transcript, Seeking Alpha, February 2016 []
  4. Ref: 2 []