Morningstar

GM's Solid Quarter Does Not Bring Any New Concerns

We see more upside to GM over time as the company continues to reduce costs, buy back stock and pay dividends.

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General Motors Co
(GM)

We are not changing our

GM once again shredded consensus earnings per share, reporting adjusted diluted EPS of $1.89 versus $1.69 consensus. But revenue declined 1.1% year over year to $37 billion and missed consensus of $40.2 billion, mostly due to an 11% fall in North American wholesale volume as GM pulled back on fleet sales.

Consolidated adjusted EBIT margin fell 30 basis points but still was a healthy 10%. Adjusted EBIT fell 4.3% to $3.7 billion as favorable mix and pricing along with continued cost-cutting efforts fell short of offsetting a $900 million headwind from lower volume and a $200 million currency headwind from the weaker Mexican peso and Canadian dollar against the U.S. dollar. A $400 million increase in capital expenditures and the slight decline in earnings led to adjusted automotive free cash flow of $2.6 billion, down about $700 million from the year-ago quarter.

CFO Chuck Stevens' comments at an analyst event in late June suggested to us a guidance increase could be coming when GM reported results in July, but management maintained 2017 EPS guidance of $6.00-$6.50. We continue to model $6.36.

We are not worried that guidance is unchanged; we see more upside to GM coming over time as the company continues to reduce selling, general, and administrative costs through 2018, and it will buy back about $5 billion of stock in 2017, about 10% of its market capitalization, while also paying $2.2 billion in dividends.

GM did not repurchase stock in the first quarter but spent $1.5 billion in the second quarter. The third quarter will be the weakest of 2017 as plant shutdowns are needed to curb excess car segment inventory, but there are still three new crossovers to launch this year: Traverse, Enclave, and Terrain.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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