What General Motors Wants Investors to Know About Profit Growth

Markets Motley Fool

With the U.S. new-car market stalled and possibly heading for a cyclical decline, the idea that General Motors (NYSE: GM) (or any automaker heavily dependent on the U.S. market) is headed for earnings growth seems like a hard sell.

Continue Reading Below

But GM is trying to make the sale anyway. In a recent presentation to analysts, Chief Financial Officer Chuck Stevens argued that the potential for bottom-line growth is a key reason for investors to consider buying GM's stock.

Did he make the case? Let's take a look.

How GM is getting strong pricing in a sluggish market

Stevens argued that GM is doing better when it comes to earnings growth than it might appear. While GM's global sales and market share fell slightly in the first half of 2017, Stevens noted that its revenue, pre-tax profit, and free cash flow all grew year over year on a "continuing operations basis" (meaning, excluding results from GM's now-sold European subsidiary, Opel AG, which was a money loser.) 

That's just one period, but there was an important takeaway. GM's profit is growing faster than its revenue, a result of strong pricing on its latest products. That's no mean feat at a time when the growth of new-vehicle sales in the U.S. seems to have stalled, and competitors are discounting in an effort to generate year-over-year gains. 

Continue Reading Below

Stevens thinks that GM will be able to sustain that strong pricing for a while longer, even if the U.S. market weakens. The reason: GM has important new products hitting the market in big-selling segments. Those products include a slew of recently launched crossover SUVs (the Chevrolet Equinox, GMC Acadia and Terrain, and Cadillac XT5), with more coming: 

Starting last year, we entered the heart of our product launch cadence. It continues this year and into '18 and '19. We will be launching in 2017 critical entries in the crossover segment, the fast-growing crossover segment. We just launched the Equinox. We're in the process of launching the Terrain. We will be launching the Enclave and Traverse as we go into Q3 and Q4. And that's on top of the Cadillac XT5 and the GMC Acadia that we launched last year. So really, opportune timing when you think about our strong product launch cadence in crossovers and a growing segment in the U.S. and globally. 

All of those models are positioned to do well in the U.S., but some will help in other markets as well. The XT5 has been a very strong seller in China since its launch, as has the Buick Envision; GM recently launched the all-new Equinox in China as well. 

GM has other new products in the works as well, including all-new versions of its pickup trucks and big truck-based SUVs that are expected to begin rolling out in about a year. Those should help GM sustain strong pricing in the U.S. for a while longer, even if the market slips. 

Stevens also noted that GM's ongoing focus on improving its returns on invested capital by exiting less profitable lines of business (like Opel) is making a significant contribution. 

Our performance also really underscores the benefits of the strategic actions we've taken over the last number of years to exit and not participate in those markets and segments where we don't think we can earn an appropriate return on capital. And again, it's showing up in better top line and profitability results. 

The other side: GM is cutting a lot of costs

Cost-cutting -- or put another way, CEO Mary Barra's ongoing effort to take better advantage of GM's vast global scale -- is also having a significant effect. He showed this slide and explained that the cost-cutting effort is bearing even more fruit than he and Barra had originally predicted.

Here's Stevens:

[GM made a commitment] to drive costs down, originally by $5.5 billion between 2014 and 2018. We were ahead of that pace last year, so we increased our commitment to $6.5 billion between 2014 and 2018. And as this chart shows, through the first half of 2017, we've achieved about $5 billion of run-rate savings. 

Stevens said that these savings will "more than offset" GM's increased investments in the development of future vehicles and advanced technologies. He also said that he wouldn't be surprised if GM raised its target again at some point between now and the end of 2018 to a level above the current $6.5 billion.

Did he make the case? 

The truth is that whether GM's profits rise or fall in the short term (over the next two or three years) is largely dependent on outside forces -- namely, the strength of the markets for new vehicles in the U.S. and China (and to a lesser extent, South America and other parts of Asia).

I think the takeaway for GM investors, and for those thinking about becoming GM investors, is this: GM is doing a lot of good work to improve its profitability and reduce its spending in ways that make sense. The results of that work are becoming plainly visible in GM's earnings results, and at some point that's likely to bring in significantly higher profits for GM. 

But if we have to ride through a recession while GM is still doing the work, it might be a few years before those higher profits show up.

10 stocks we like better than General Motors
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and General Motors wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

John Rosevear owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.