General Motors Continues to Overdeliver
We plan to lower our fair value estimate but continue to see excellent upside for GM.
We think the company still has more room to improve despite a third-quarter record consolidated adjusted-EBIT margin of 8.3%, up 30 basis points year over year, because the company is not done making its operations more efficient. Platform reductions will continue into the next decade and other overhead reductions are still to come with management about $3.7 billion into a $5.5 billion cost reduction plan relative to 2014 levels. Furthermore, GM’s crossover lineup is being redone next year, which is well timed with these vehicles extremely popular due to cheap gas.
We found the third-quarter results to be excellent with good quality of earnings. Revenue increased 10.3% year over year to $42.8 billion, which easily beat consensus as did adjusted EPS of $1.72 versus consensus of $1.45. Favorable year-over-year variances in volume and pricing due to good demand in full-size pickups as well as new offerings such as Malibu, Cruze, and Camaro, and the Cadillac XT5 crossover helped offset a $300 million foreign exchange headwind to earnings ($100 million of which was from Brexit) and a $600 million headwind from materials on new launches. Automotive cash flow for the quarter increased to $3.5 billion from $800 million in the prior year’s quarter. Management’s full-year 2016 adjusted auto cash flow guidance remains about $6 billion and totaled $5.2 billion in the first nine months of the year. Management also expects 2016 EPS at the high end of guidance of $5.50-$6.00, as do we.
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