General Motors Responds to the Market’s Recession Fears With Great Third-Quarter Earnings Results

General Motors’ (GM) stock rose over 4% after the company reported third-quarter results on Oct. 25, thanks partly to adjusted diluted EPS of $2.25 beating the Refinitiv consensus of $1.88. We are maintaining our fair value estimate. We think the market was expecting bad news similar to Ford’s third-quarter announcement on Sept. 19, of partially built vehicles from the chip shortage and $1 billion in extra costs perhaps jeopardizing GM’s full-year guidance. GM instead maintained 2022 guidance, repurchased $1.5 billion in stock, and posted excellent automotive free cash flow of $4.6 billion, over triple the first half’s $1.4 billion. At June 30, GM had 95,000 partially built vehicles due to the chip shortage; nearly 75% of them have now been shipped. Management reports demand remains very strong and consumers continue to want the highest-dollar trim packages. Inventory has improved greatly from June 30 but remains historically low, so we see upside in GM’s volume next year while pricing falls as supply improves. Third-quarter total company adjusted EBIT of $4.3 billion brings the year-to-date figure to $10.7 billion. Full-year guidance is $13 billion-$15 billion, so fourth-quarter results will decline from the third quarter unless GM hits the high end of guidance. CFO Paul Jacobson said GM continues to track to the midpoint.

Third-quarter adjusted EBIT saw a battle between higher logistics and commodity costs and strong volume and pricing. The year-ago quarter saw the bottom of industry U.S. light-vehicle inventory, so GM had a $5 billion volume tailwind this quarter and $2.1 billion in favorable pricing, all of which offset a $1.8 billion mix headwind and $3.6 billion in unfavorable costs. Jacobson said the expected $5 billion in commodity and logistic cost increases this year remains the plan but now sees about half of that amount from commodities rather than two thirds. GM uses multiyear contracts for steel, so that $5 billion will not entirely reverse itself in 2023.