Morningstar

A Healthy-Looking 2017 for Undervalued GM

The automaker posted record full-year adjusted automotive free cash flow and record full-year revenue, adjusted EBIT.

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General Motors Co
(GM)

Weak currencies against the dollar from England, Mexico, and Argentina cost GM about $500 million in EBIT in the quarter and cost increases for crossover launches later this year and autonomous vehicles led to a 14% decline in adjusted EBIT. Still, better working capital contributions led to adjusted automotive free cash flow increasing by $2 billion for the quarter to $1.7 billion.

GM posted record full-year adjusted automotive free cash flow of $6.9 billion, up from $2.2 billion in 2015, and also generated record full-year revenue, adjusted EBIT, and adjusted EBIT margin, the latter rising 40 basis points to 7.5% including GM Financial.

Management confirmed guidance given last month for 2017, which we summarized in our Jan. 10 note. GM North America should stay strong as eventual tailwinds from new generations of crossovers as well as continued cost-cutting moves should enable GMNA to post adjusted EBIT margin over 10% for the third straight year in 2017.

GM Europe improved considerably for full-year 2016 with a loss of $257 million versus $813 million in 2015. Without Brexit, management would have met its break-even guidance but now is hopeful for a break-even GME in 2018 as 2017’s loss will be about equal with 2016.

China will face large carryover pricing pressures of about 5%, but recent launches such as the Cadillac CT6, Baojun 560 and new crossovers in 2017 will ease some of that headwind.

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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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