GM’s Results Should Keep Cruising On U.S And China Growth
General Motors (NYSE:GM) is scheduled to announce its Q1 earnings on May 2nd. The stock has traded narrowly over the past three months as uncertainty looms over the extent of its European losses. GM, like Ford Motors (NYSE:F), is bleeding losses in Europe and hopes to become profitable only by the middle of the decade. On the bright side, higher sales of the more profitable pickups and luxury cars in the U.S., could push margins higher. In China, GM continues to perform solidly, and the world’s biggest automobile market is the company’s most important division according to our estimates.
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North America Still Rolling
We feel North America could be the star of the show because of impressive sales of its pickups and luxury brand Cadillac. Both the pickups and luxury cars have wider margins compared to regular cars and strong demand for these vehicles bode well for the company’s profitability.
This comes as a relief to the automaker since North American margins fell to a measly 5.8% in the fourth quarter of 2012, after GM offered huge discounts in order to clear its burgeoning inventory. The full year operating margins for North America stood at 7.5% in 2012, still significantly lower than Ford’s 11%. [1] Posting higher margins on its home turf becomes all the more important since Europe will continue to post losses for the foreseeable future.
Unit sales of GM’s light trucks are up almost 16% through March, outperforming the broader market. Furthermore, GM will soon be introducing the redesigned models of its best selling Silverados in the spring and is the main reason why we expect the pickup sales to remain strong for the rest of the year as well.
Cadillac’s revival seems on track as the automaker is targeting 30% sales growth for the luxury brand in 2013. Last year, GM launched a new ATS sedan as well as the remodeled XTS under the Cadillac brand. The sales of the luxury brand have been strong since the second half of 2012, after these new cars debuted. GM will also be launching a refreshed CTS sedan soon, which will be powered by a solid 420 horsepower V-6 engine. Cadillac’s sales in the U.S. were up 38% through March. [2] Overall, GM’s sales in the U.S., North America’s biggest segment, are up 9.3% in the first three months of the year.
Europe: How Much Will The Losses Be ?
Investors will be keenly eyeing the magnitude of the European losses. GM lost $1.8 billion in Europe in 2012, and the losses this year could top $2 billion. [2] GM hopes to become profitable by mid-decade, but deteriorating market conditions in Europe combined with a weak brand image, offer no guarantee of things going according to the company’s plans. GM’s sales in Europe have declined in excess of 10% through March, although the market share has been relatively stable.
Europe is a big concern for GM as well as Ford as both automakers are reporting losses due to overcapacity issues. Moreover, governments and labor unions are a major impediment to shutting plants with excess capacities.
China
GM’s Chinese operations contribute more than 35% to the company’s stock price as per our estimates. GM is the market leader in China with a share of 14.7%. In fact, last year, China overtook the U.S. as the biggest market for the automaker. GM sold 9.6% more vehicles this quarter, although there was a slight deterioration in the market share. The Chinese automobile market has started the year strongly with sales up 13% through March. [3]
Since GM operates in China along with its joint ventures (JVs), the automaker reports the net income earned through equity affiliates. Since an awful lot of Chinese customers are first time buyers, they prefer the smaller, more fuel efficient cars. And that is where GM is putting its money.
To fulfill the needs of the Chinese customers, GM and its joint ventures (JVs) are investing $1 billion to build their third plant in Southwest China, which will raise the production capacity by another 400,000 units by 2015. We estimate the net income earned per car to remain relatively flat due to a greater proportion of the smaller, inexpensive vehicles.
We currently have a price estimate of $28 for General Motors’s stock, which is in line with the current market price.
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Notes:- GM 10-k [↩]
- GM U.S. Sales [↩] [↩]
- GM Outsells VW in China for First Time in Three Quarters, April 12, 2013, bloomberg.com [↩]