Although light-vehicle sales in North America are plateauing, General Motors (NYSE: GM) has managed to craft a story that Wall Street is buying. The story is simple: Shed operations in unprofitable markets, cut costs dramatically, focus on highly profitable trucks and SUVs, continue to expand sales in China, and prepare for autonomous vehicles through acquisitions.
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General Motors announced third-quarter results Tuesday, and a GAAP loss of roughly $3 billion wasn't enough to stop the recent momentum of the stock, which hit a record high during intraday trading. Here are some of the key earnings numbers and important takeaways for investors.
By the numbers
GM continued its recent trend of topping Wall Street estimates when it reported adjusted earnings of $1.32 per share on revenue of $33.6 billion. That compares favorably with Wall Street estimates calling for $1.13 per share on revenue of $32.67 billion. Its year-over-year performance, however, was weaker. On a continuing-operations basis, revenue declined $5.3 billion from the prior year, driven primarily by a drop in wholesale volumes in North America as GM matched supply and demand and worked through excess inventory. The lower North America wholesale volumes also knocked GM's EBIT-adjusted figure down $1.1 billion to $2.5 billion.
Beyond the key financials, there were some other important takeaways from GM's third quarter, including the one-time charge from selling its European operations.
Not as bad as it appears
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One important takeaway for investors is to understand the impact of GM's sale of Opel/Vauxhall, its European operations. On a consolidated basis, GM reported a net loss of $3 billion for the third quarter -- and remember that analysts refer to EBIT-adjusted results, rather than these consolidated results, to better judge GM's core business excluding one-time charges. That quarterly loss was driven by a one-time charge of $5.4 billion from the Opel/Vauxhall sale. That sounds like a big deal, and $5.4 billion is a significant number, but it's not as bad as it appears. The charge is mostly non-cash and includes roughly $4.3 billion of unrealized deferred tax assets. Basically, GM isn't losing $4.3 billion in cash as a result of the charge; it's simply giving up the opportunity to use $4.3 billion in deferred tax assets to offset future profits.
During the dark days of the past recession, GM was forced to shed its financial division during its bankruptcy. In the years since, after the government sold off the last of its GM shares, GM acquired AmeriCredit in an all-cash transaction and renamed the company GM Financial (GMF) -- and it's become a pillar of GM's growth story. Investors ask how automakers can grow revenue and profits amid peak auto sales in North America, and the answer for GM has partially been to expand GMF. During the third quarter, GMF posted record revenue of $3.2 billion and strong growth of earning assets, which were up 31% from the prior year.
The good news is there's still plenty of room for growth as the automaker increases GMF's penetration of retail sales and expands its portfolio of earning assets, and it's still far away from matching the size of Ford Motor Company's (NYSE: F) Ford Credit, which has long been an excellent advantage for the crosstown rival.
Across the board
With annual losses from GM's European operations in the rearview mirror, it's worth noting that all of the company's operating segments posted profits for the first time since the fourth quarter of 2014.
"Solid performance in all operating segments led to a very good quarter," said Chuck Stevens, executive vice president and CFO, in a press release. "With an aggressive vehicle launch cadence through the fourth quarter and an ongoing intense focus on costs, we project strong results through the end of the year."
North America will continue to drive the bulk of GM's quarterly results, and investors should watch to see if the automaker's North America EBIT-adjusted margin of 8.3% during the third quarter moves back into the low double digits once it works through its planned reduction in wholesale volumes. In the near term, GM needs to continue generating more earnings in its international operations, largely driven by China. It also needs to keep cutting costs and expanding GMF.
It finally seems as if Wall Street is buying into the idea that GM can execute on all of those strategies and is starting to believe in its long-term potential as the industry prepares for autonomous vehicles. That's a welcome change of pace for investors.
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