General Motors Co. (NYSE:GM). Despite the impact of the pandemic, GM’s 3Q20 results were significantly better than we anticipated, helped by massive cost cutting, incentive programs, and pent-up consumer demand. However, we remain concerned that the coronavirus will reduce large discretionary purchases in 4Q20 and 2021, and look for seasonally adjusted annual sales (SAAR) to fall by 9% to 15.5 million vehicles this year. At this stage in the economic cycle and with COVID-19 still a significant threat to industry sales and profits, we are cautious about GM and other automotive stocks.
The stronger-than-expected 3Q20 results were driven by strict cost controls, the absence of UAW strike expenses that hurt results in 3Q19, and higher margins in the GMNA segment. Revenue was in line with the prior year at $35.480 billion.
The North American division (GMNA) posted a 3Q20 adjusted EBIT profit of $4.4 billion. The stronger results reflected higher pricing, less incentive spending, and market share growth. The EBIT-adjusted margin increased to 15.0% from 10.8% a year earlier. Revenue was comparable to the prior year at $29.1 billion, while wholesale vehicle unit sales were down modestly.
General Motors International (GMI) reported an adjusted EBIT loss of $0.3 billion. Wholesale volume fell 29%, due primarily to the impact of COVID-19. Equity income from the company’s operations in China was comparable to the prior year.
The GM Financial division reported net revenue of $3.421 billion, down from $3.659 billion. Third-quarter adjusted EBIT was $1.2 billion, up from $0.7 billion. The increase was attributable to high used vehicle prices.
GM has begun to report results for its new division, GM Cruise. In 3Q, the division reported a pro forma EBIT-adjusted loss of $0.2 billion, compared to an EBIT adjusted loss of $0.3. The losses reflect continued investment as the company moves towards the commercialization of an autonomous ride-sharing fleet.
EARNINGS & GROWTH ANALYSIS
The company’s 3Q20 results follow similarly strong earnings from Ford and Fiat Chrysler in recent weeks. Strong demand for trucks and SUVs led both companies to beat analyst expectations. While consumer spending in certain sectors lags prepandemic highs, spending on cars and car parts has been strong. Nevertheless, GM has withdrawn its guidance for 2020.
The 2020 consensus estimate is $4.28.
Looking ahead, we expect the SAAR to fall to 15.5 million units in 2020, down 9% from 17.0 million in 2019. Given current economic uncertainty, we believe that more consumers will put off the purchase of new cars and other expensive discretionary items. Given that most auto purchases are financed, the decline in vehicle sales could also accelerate if lenders tighten credit standards. In addition, we believe that sales of used cars, which are cheaper for buyers and a source of cash for hard-pressed sellers, could further pressure the SAAR in the near term.
FINANCIAL STRENGTH & DIVIDEND
Total debt, consisting of both short-and long-term borrowings, stood at $118.5 billion.
However, the company suspended the dividend on April 27, 2020. The suspension is expected to save the company $1.6 billion annually.
MANAGEMENT & RISKS
Mary Barra succeeded Dan Akerson as CEO on January 15, 2014. Ms. Barra was previously EVP of Global Product Development & Global Purchasing and Supply Chain. She has also held a number of engineering and staff positions at GM, including plant manager and general director of Internal Communications in the North America division. She began her career with General Motors in 1980.
The GM board has also separated the chairman and CEO positions. Ms. Barra is a member of the board, but Director Theodore (Tim) Solso has succeeded Dan Akerson as chairman. Former CFO Dan Ammann has been named GM president, with responsibility for regional operations worldwide. Chuck Stevens has replaced Mr. Ammann as CFO.
General Motors and its subsidiaries face risks from general economic weakness, as well as from changes in consumer preferences and spending patterns. The company is also at risk from higher costs for components and raw materials, and from supply disruptions. In addition, GM operates in a highly competitive industry that continues to show signs of excess manufacturing capacity.
General Motors, one of the world’s largest automakers, traces its roots back to 1908. GM and its strategic partners produce cars and trucks in 31 countries, and sell and service these vehicles through the following brands: Buick, Cadillac, Chevrolet, FAW, GMC, Daewoo, Holden, Jiefang, Opel, Vauxhall and Wuling. GM’s largest national market is China, followed by the United States, Brazil, Germany, the United Kingdom, Canada, and Italy. The company emerged from bankruptcy in July 2009 and went public through a new share offering in November 2010.
Our 2021 estimate, and well below the historical average for price/book, price/sales, price/cash flow and price/EBITDA.
On November 11 at midday, HOLD-rated GM traded at $41.15, up $0.07.