General Motors' Profit Soars Despite Sluggish Sales Growth

By Markets Fool.com

General Motors (NYSE: GM) announced its third-quarter earnings results before the bell on Oct. 25. Here's what investors need to know.

Continue Reading Below

The key numbers

GM posted strong gains across the board compared to its results in the third quarter of last year.

Source: General Motors.

"EBIT-Adjusted" is the key non-GAAP measure used by GM's management to track the underlying performance of its business units. It's net income before taxes and the interest expenses related to the automotive side of GM's business, but after special items. GM's calculation of EBIT-adjusted has been consistent for several years.

How GM's business units fared during the third quarter

Continue Reading Below

GM's North America unit earned $3.5 billion before taxes, an improvement of $193 million from a year ago, with an extremely strong EBIT-adjusted margin of 11.2%. While U.S. sales appear to have plateaued, GM has been able to maintain strong pricing for its high-profit pickups and SUVs despite increasing competitive pressures.

Strong demand for GM's big SUVs helped drive a 11.2% margin in North America. Image source: General Motors.

GM Europe lost $142 million, an improvement of $89 million from a year ago. GM lost billions in Europe over the last decade-plus, but it has long hoped to break even for the full year in 2016. "Brexit" has put that hope at risk, however. In July, CFO Chuck Stevens warned that the decline of the British pound following the U.K.'s decision to exit the European Union would hurt GM Europe's results by about $400 million over the balance of 2016. About $100 million of that impact showed up in the third quarter, he said on Thursday. Through the first three quarters of 2016, GM Europe has lost $11 million.

GM International Operations includes its vast China operation, as well as other efforts in Asia, Africa, and Oceania. The unit earned $271 million in the third quarter, up $2 million from a year ago. GM's joint ventures with Chinese automakers returned $459 million of equity income in the quarter, down only slightly from $463 million a year ago despite increased competitive pressure from low-cost domestic Chinese producers.

As in the U.S., strong SUV sales are driving good profits for GM in China. The Buick Envision has sold very well since its introduction in China last year. Image source: General Motors.

GM South America lost $121 million, an improvement of $96 million from a year ago. Conditions continue to be very difficult in the region, with Brazil and other major regional markets mired in deep recessions, but GM said that cost cuts and somewhat improved sales volumes helped it eke out that year-over-year improvement.

GM Financial, the company's growing in-house bank, earned $229 million before taxes in the third quarter, down slightly from $231 million a year ago. Despite industrywide concerns about deteriorations in auto lending, GM Financial's credit losses and retail delinquencies were roughly stable at just 2% of the portfolio (from 1.9% a year ago).

What GM executives said about the quarter

"Our record third quarter, led by strong performance in the U.S. and China, reflects our determination to deliver on our commitments," CEO Mary Barra said in a statement. "We will continue executing our plan to deliver earnings that enhance shareholder returns."

"Strong bottom line performance this year puts us solidly on track to deliver on our annual earnings outlook, and our cash generation has allowed us to complete our initial share buyback ahead of schedule," Stevens said.

Last year, GM committed to a $5 billion common-stock buyback as part of a larger program to return cash to shareholders. That program was completed in the third quarter, one quarter ahead of the promised schedule. Speaking with reporters shortly after GM's results were released, Stevens indicated that another share buyback program is forthcoming.

Cash flow, debt, and available liquidity

GM's adjusted automotive free cash flow was $3.5 billion in the third quarter, up from about $800 million a year ago. That was driven by higher earnings and lower recall-related cash payments, GM said, and is net of about $500 million in increased capital expenditures.

As of Sept. 30, GM had $21.5 billion in cash on hand and another $14 billion in available credit lines, for total liquidity of $35.5 billion. Debt related to GM's automotive business stood at $10.8 billion.

Outlook: Upbeat full-year guidance

GM didn't change its previous upbeat guidance for the full year. But it did note that it expects its full-year "adjusted" earnings per share to come in at the "high end" of its previously stated range, $5.50 to $6.00. GM earned $5.02 on the same basis in 2015.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.