GM Fights Off Coronavirus Impact to Stay Profitable
Despite a major hit in the first quarter, we are not changing our fair value estimate for the no-moat firm.
GM (GM) stayed profitable in first quarter despite a $1.4 billion EBIT hit from the coronavirus shutting down China in January and North America production in late March. Adjusted diluted EPS fell 56% year over year, but the $0.62 reported beat the Refinitiv consensus of $0.30. The figure would have been $0.90 if not for an unrealized mark-to-market loss of GM’s holdings in Lyft and Peugeot. Adjusted consolidated EBIT margin fell by 280 basis points to 3.8%. We don’t see a reason to change our fair value estimate and we are glad to hear GM North America plans to restart in the U.S. and Canada the week of May 18. There will be one shift a day initially and GM will have a very high priority on light truck models, as we expected. China operations restarted in mid-February and consumer demand there continues to improve.
GM’s adjusted automotive free cash burn was $903 million versus a $3.9 billion outflow in first-quarter 2019, mostly due to improved working capital. Management gave detailed free cash flow expectations for the second quarter and the working capital unwind of reducing payables will result in a net working capital burn of $3 billion-$4 billion. This drain, along with other items such as a $1 billion-$2 billion sales incentive payout from prior sales, leads to a forecast second-quarter burn of $7 billion-$9 billion. March 31 liquidity is $33.4 billion, which is almost all cash as credit line availability was $1.4 billion. The $1.4 billion reduces by $1 billion in July. Management said even if GM cannot sell any vehicles, it has liquidity to get into fourth quarter based on GM burning about $2 billion a month, better than we estimated.
Earlier-announced cost savings in North America helped drive a cost reduction in GMNA of $600 million. These savings, along with a $300 million mix tailwind, enabled GMNA to offset $600 million lost volume headwinds and increase segment income 15.7% to $2.2 billion. GMNA operating margin rose by 160 basis points to 8.5%.
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David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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