Earnings Review: Growth May Be Hard To Come By But GM’s Sales Are At A Very High Level Right Now
General Motors (NYSE:GM) reported earnings per share (EPS) of $ 1.82 for the second quarter of fiscal year 2016 on Thursday, July 21st on a 11% year-over-year growth in revenue and a 380 basis point expansion in operating margin. The company achieved such a high level of profitability despite a 5.7% reduction in new vehicles sold in North America and a 90 basis point reduction in market share in China, GM’s biggest market. This shows that the company’s volumes are at an extremely high level right now and, even though growth from this level should be slow, profitability should remain high.
GM North America: No Cause For Worry
We’ve written previously about how sales of all GM brands have declined in the U.S. in the first half of 2016 and about GM’s misguided marketing campaign for the new Chevrolet Silverado pick-up truck. However, despite these problems resulting in a 5.7% reduction in new units sold, the company reported a 14% year-over-year growth in revenue and a 160 basis point expansion in operating margin. This was largely the result of a close to 21% increase in average revenue earned per new unit sold. According to the company, Average Transaction Prices for full size pickups are $ 2,500 above last year’s second quarter’s levels and average transaction prices for all brands are up $ 1,500 per unit. This has given the company some leeway to increase incentives to make up for the loss in market share in the coming quarters. In the beginning of July, incentives on Chevrolet Silverado are up 76% from June levels and on GMC Sierra are up 147%.
GM China: Mixed Signals
China is the world’s biggest auto market and has been one of the fastest growing markets in recent years. However, last year’s stock market crash, impending fears of an economic slowdown, and the revaluation of the Yuan together stoked fears of a slowdown in this market. As a result, GM revised its growth forecasts for the region down to 3%-4% for the 2016-2020 period, with most of the growth expected to come from tier 3 and tier 4 cities. Despite those fears, new vehicle sales in China grew by close to 9% for the second quarter. GM’s units sold increased by close to 2%, with average equity income per unit sold decreasing by 8.1%. This represents both good and bad news for the company. The good news is that the market seems to be doing well, although some of this might be attributable to the relaxation of sales tax on certain vehicles by the Chinese Government. That said, all GM brands except Chevrolet are growing their volumes. The bad news is that these new sales seem to be lower margin ones, which should put some pressure on the amount of value growth in China can contribute to GM’s market cap.
GM Europe: Encouraging
Europe has been a sore spot for many auto companies in recent years. GM itself has lost over $ 3 billion on its operations in the region in the last three years. However, the U.S. auto maker’s performance in Europe in this quarter was encouraging, with the company reporting an operating profit of $328 million compared to losses of $ 45 million in the same quarter last year. The company’s operating margin expanded by 350 basis points and its average transaction prices were up 5.1% or $ 800 per unit. Going forward, given the uncertain economic and political situation in many Eurozone countries, it is difficult to say whether the company can retain either these volumes or these transaction prices going forward.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors
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