Terrific Results From GM Support Our Thesis

GM North America posted a quarterly record for earnings of $3.6 billion and a very impressive record 12.1% margin, up 160 basis points year over year. This supports why we are not troubled to see GM’s overall U.S. market share down 110 basis points in the first half of the year after the company drastically reduced rental fleet sales. Profits matter more than total market share, and GM’s U.S. retail share in the first half of 2016 is up 40 basis points, helping drive that profit growth.

Also encouraging is that management increased its full-year 2016 adjusted EPS guidance to $5.50-$6.00 from $5.25-$5.75 (we model $5.93). This improved outlook is good to see in light of management’s disclosure of a potential Brexit headwind of $400 million to EBIT in the second half of the year. This headwind is unfortunate because GM Europe actually made a profit of $137 million in the second quarter, its first quarterly profit in five years. The ultimate effect of Brexit headwinds this year will depend on U.K. consumers’ confidence and exchange rates. Adding to the problem is that uncertainty about how the United Kingdom will exit the European Union is likely to remain for a long time as trade agreements among governments have to be redone.

Automotive liquidity remains healthy at $34.1 billion at June 30, including $20.1 billion of cash. Management did not buy back stock in the second quarter, but CFO Chuck Stevens confirmed that buybacks across 2015-16 will total $5 billion as planned and GM should reach this level before the end of the year. The math on that means second-half 2016 buybacks will be about $1.2 billion versus only $300 million in the first half.

Also, GM paid far less for Cruise Automation, which it closed on in May, than the $1 billion rumored in the press. Consideration was $581 million split as $291 million in cash and $290 million in stock (9.3 million shares). Another $107 million (3.4 million shares) of restricted stock units went to former Cruise shareholders. These RSUs vest upon Cruise meeting certain technological requirements and are contingent on these individuals remaining employed with GM. We think GM bought Cruise for its autonomous-vehicle technology and its software engineering talent. GM is already using Cruise to help its recently started Chevrolet Bolt EV autonomous driving tests in San Francisco.

Over time, GM’s autonomous technology can be used to sell vehicles to consumers, but we also think this technology will come to the company’s Maven mobility brand, perhaps allowing GM to have an autonomous ride-hailing fleet. We think such a fleet may be needed in light of where the industry is going and to combat new entrants such as Uber, Tesla, and Lyft, the last of which GM already owns about 9% after a $900 million investment in January.