GM Still Has a Bright Future
The automaker turned in disappointing second-quarter results, but there still is potential for significant margin improvement over the next few years, says Morningstar’s Dave Whiston.
The automaker turned in disappointing second-quarter results, but there still is potential for significant margin improvement over the next few years, says Morningstar’s Dave Whiston.
We found General Motors' (GM) second-quarter results disappointing, but we are leaving our fair value estimate unchanged because we still see potential for significant margin improvement over the next few years. Second-quarter adjusted diluted earnings per share of $0.58, which includes a $1.2 billion recall repair charge, missed consensus by a penny while a 1.3% revenue increase also missed consensus.
Despite the earnings miss, we calculate GM North America still increased adjusted EBIT 9.6% year over year excluding the recall charge, and overall automotive adjusted EBIT margin increased 140 basis points to 6.5%. GMNA's adjusted EBIT margin, however, came in flat (per our math) at 9.3%, and we would have preferred seeing a number closer to 10%, given the launch of new SUVs and fresh pickup offerings. Pricing tailwinds were $1.1 billion for the overall company, but higher fixed costs ate into about one third of that improvement. Management continues to guide to GMNA margins at 10% by middecade and upheld its January guidance of stronger second-half earnings for the whole company compared with the first half 2014. We think this prediction is reasonable, given new product and the face that the second half of the year has the majority of U.S. pickup truck sales.
The company also announced a $400 million special item related to cost estimates under the compensation program for the ignition switch recall and said this amount could increase to $600 million. This number is far below our $7 billion reserve for the program, injury lawsuits, loss of resale value, and government fines, but we are leaving our reserve and fair value estimate in place until we have more clarity regarding the many unknowns related to the ignition recall.
It is also important to remember that there is more to the GM story than just the success of pickups and SUVs. GM has new launches this year in the Cadillac ATS coupe and midsize pickups, a new Buick midsize crossover next year, and multiple Buick sedan and large crossover launches in 2016-17. Cadillac will also probably have its long overdue flagship sedan, the LTS, out in late 2015 or 2016 and a new SRX crossover in 2016. Chevrolet and GMC have staggered introductions of their midsize and large crossovers across 2015-17.
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