Image Source: Abdullah AlBargan
By Kris Rosemann
Newsletter portfolio holding General Motors (GM) expects to report company records for revenue, EBIT-adjusted, and EBIT-adjusted margin for the full-year 2016 later this quarter, but its 2017 expectations are cause for even more optimism after management presented updated guidance for the year at the Deutsche Bank 2017 Global Auto Industry Conference in Detroit January 10. We continue to like GM’s valuation and dividend growth opportunity, and the company remains a position in both newsletter portfolios.
The automaker expects 2017 earnings per share on an adjusted and diluted basis to come in a range of $6.00-$6.50, compared to expectations of $5.50-$6.00 for 2016. It also expects to at least maintain 2016 levels of EBIT-adjusted and EBIT-adjusted margin on higher revenue in the current year en route to $6 billion in automotive-adjusted free cash flow. GM has increased its cost efficiency target by $1 billion to $6.5 billion in savings through the year 2018, $4 billion of which has already been realized as of the end of 2016. The efficiency estimate increase is largely due to anticipated savings in material, logistics, manufacturing, and general administrative costs.
GM’s strong overall outlook for 2017 is based on its expectations for another year of solid performance from its North America and China (FXI) operations, improving conditions in South America, growth in its financial arm, the aforementioned cost efficiencies, and ongoing vehicle launches. The automaker projects that 38% of its global volume in the period from 2017-2020 will come from new or refreshed vehicles (those in production less than 18 months), up from 26% in the 2011-2016 period. Crossovers, SUVs and light trucks are the main drivers of such a shift, as those vehicle classes are anticipated to make up 52% of GM’s global volume of new or refreshed vehicles in the 2017-2020 period, up from 38% from 2011-2016. Though we like the strength of GM’s new and refreshed vehicle lineup, we will be watching the performance and popularity of these unproven vehicle models closely.
With 2016 hardly in the rearview mirror, GM’s 2017 outlook has us excited. We are aware of the potential for the US auto market to have reached a peak for this cycle in terms of demand, but GM’s building presence in the Chinese market, where it recently set a company annual sales volume record, reduces its dependence on the US market if only slightly. We also note the hazards of investing in such a cyclical operator this late in the economic cycle, especially one with growing financial division, but the company’s shares are just too cheap and its dividend is on solid ground, in our view. Credit profiles across the auto loan market have been worsening, but we don’t think they are cause for concern just yet. In any case, if GM expects to continue outperforming its peers, it will have to deliver on the majority of its new and refreshed vehicle models in coming years. We think it will.
Importantly, however, for opportunistic investors, shares of GM are still changing hands at abnormally low earnings multiples–less than 6x the midpoint of 2017 guidance–and a ~4.2% dividend yield makes shares even harder to pass up. We’re holding onto shares for the time being in both newsletter portfolios as we see the potential for upside to our current fair value estimate of $43 given today’s news.