Will Higher Pricing Drive GM’s Stock Price After Q3 Earnings?

by Trefis Team
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General Motors (NYSE: GM) will report its third-quarter results on October 31, 2018, and conduct a conference call with analysts the following day. The market expects the company to post an EPS (Non-Gaap) of $1.25 and revenue of $35.34 billion, a 5% decline in the earnings and 5% rise in the revenue respectively. Higher sales is a result of better product mix and record average transaction price per vehicle, however, the earnings are expected to decline due to slow growth in the US markets, higher raw material costs in its international markets, and a weaker performance in China’s market.

We have a price estimate of $36 per share for the company, which is higher than the current market price. View our interactive dashboard –Higher Average Transaction Price Per Unit To Drive General Motors Q3 Results – and modify the key assumptions to arrive at your own price estimate for the company.

Higher Average Pricing in North-American Markets Will Drive Q3 Results

The company reported its third-quarter sales of 694,638 vehicles in the North-American market, which is an 11% decline in sales in this region. However, a higher proportionate sale of more expensive and higher margin pickup trucks, crossovers, and SUVs is, in turn, expected to aid the company’s top line and bottom line growth. As a consequence of the same, GM stated that its average transaction price (ATP) per vehicle increased by about $700 y-o-y in the third quarter, through the strength of sales of new products such as the Chevrolet Tahoe and GMC Traverse.

The average transaction price (ATP) per unit was $4000 above the industry average in the third quarter, thus experiencing a 1.2% decline in sales revenue from this region. Higher ATP was a result of increased sales of higher margin products and sharply lower incentive spending. Incentive spending was 12% of ATP, lower than the industry’s average and lower than the Asian competitors. The overall sales volume were low, though, in both the North-American and the Chinese markets.

GM’s cumulative 9-month sales in China stand at approximately 2.7 million units, a 2.5% decline y-o-y, out of which the company delivered 835,934 vehicles in its Chinese markets in the third quarter, a 15% decline as compared to Q3’17. The decline in sales was mainly due to a softening vehicle market in China and an increasing demand for SUVs’, MPVs, and luxury vehicles. The company is facing fierce competition in the world’s largest automobile market, China, and trying to build a better customer relationship by meeting the customer needs for connected vehicles.

The newer products were well received by the customers in China, almost all experiencing a rise in sales, while other less selling models were experiencing either product changeovers or technology changeovers. Electric Vehicles sales have been rising, too. Thus, the company is focusing on an improved product mix with a focus on SUV’s, luxury vehicles, and crossovers. General Motors has witnessed the strongest demand in these segments and has launched four new models in the third quarter and plans to launch another 2 new models in Q4.

Further, GM’s Cruise has been majorly funded by Softbank in the second quarter and has recently received an equity investment worth $750 million from Honda Motor Company in the third quarter. Softbank vision fund had invested the first tranche of $900 million in the second quarter and will complete the second tranche of $1.35 billion in the near term, following which GM will invest $1.1 in GM’s Cruise, which will bring the Softbank’s stake in Cruise to 19.7%. Honda joins the Cruise with the equity investment and will invest over $2 billion in the next 12 years, which will bring Honda’s stake in GM’s Cruise to 5.7%. Cruise has been set up for investment that serves the purpose of mass production of autonomous vehicles for global and commercial deployment.

 

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