Let’s cover some ground on General Motors’ (GM) third-quarter results.
What management said:
“GM delivered strong earnings and achieved several third quarter records that included net income, EBIT-adjusted, EBIT-adjusted margins, EPS diluted-adjusted and adjusted automotive free cash flow. Net income increased 104% to $2.8 billion as net revenue rose 10% to $42.8 billion, which is an all-time record. EBIT-adjusted was up 14% to $3.5 billion. EBIT-adjusted margin was 8.3%, up 0.3 percentage points and EPS diluted-adjusted was up nearly 15% to $1.72. Adjusted automotive free cash flow was $3.5 billion, up from $0.8 billion last year and ROIC adjusted of 30.6% on a trailing four-quarter basis was an all-time record continuing the positive impact of our disciplined capital allocation framework. Given our outstanding performance this year, we are on track to deliver a record 2016 on top of a record 2015 and a very strong 2014. In addition, we expect to be at the high end of our full-year EPS diluted adjusted guidance of $5.50 to $6 per share.” – CEO Mary Barra
The scoop:
GM’s third quarter performance was solid in almost every financial metric as the auto maker continues to build on the success of prior years. We liked to hear that GM’s bottom-line is going to be at the high end of its guidance range, and frankly, it’s just hard not to like its return on invested capital marks and adjusted automotive free cash flow performance. We like that GM is buying back its undervalued stock with the company completing its initial $5 billion buyback program (and planning to purchase more in the current quarter), and we can’t complain about its market-share performance. US retail share is growing, and Chevrolet and Buick are leading the charge. GM noted “very strong performances in North America and China,” though the market remains extremely competitive.
Insight from the quarterly conference call:
“For Europe, through the first nine months of the year, we broke even. In fact, at the end of H1, we were on plan to breakeven for the full year. Because of the UK referendum and the resulting devaluation of the British pound, we continue to expect that we will incur about $400 million impact in the second-half of the year, and the team is working extremely hard to minimize the effect of this headwind. But, even with the Brexit situation, our Opel, Vauxhall brands continue to show strength.” — CEO Mary Barra
“We expect the U.S light vehicle industry to be in the low to mid 17 million SAAR range for the year. And we also continue to expect the industry will remain strong, albeit in a plateau environment over the next number of years.” — CFO Charles Stevens
“…we recognize the industry is increasingly competitive, especially as consumer preferences are shifting away from sedans and more towards SUVs and trucks. We’ve remained absolutely committed to our disciplined retail-focused go-to-market strategy, and we have demonstrated that by managing supply and demand, and through disciplined pricing. In fact on average, our third quarter incentives as a percentage of transaction price significantly under paced the industry.” — CFO Charles Stevens
Are we changing our minds with our position?:
No. The competitive environment in the auto industry has probably never been more intense, but GM has such an intriguing valuation and large dividend yield that its equity price may find considerable support at current levels. At ~$30 per share, GM is trading at just 5 times current-year earnings at the high end of its guidance range, and its dividend yield of ~4.8% is supported by considerable automotive free cash flow. GM’s performance will be cyclical and the auto cycle may be nearing a “plateau,” but even if its earnings come under pressure, shares are just too cheap. We plan to keep the position in the Best Ideas Newsletter portfolio.