More Quarters Like This One and GM Could Quiet the Skeptics
General Motors (GM) - Get Report keeps reporting numbers that indicate the business is firing on all cylinders. Maybe it is time for the company's shares to finally shift out of neutral.
Detroit-based GM reported second-quarter earnings of $1.86 a share, excluding special items, topping estimates of $1.52 a share, on revenue that rose by 11% to $42.4 billion. The company also said it now expects to report adjusted Ebitda of $5.50 to $6 a share in 2016, up from previous guidance for full-year earnings of between $5.25 and $5.75 a share.
"This was an outstanding quarter for GM," Chairwoman and CEO Mary Barra said in a statement. "Our results were generated by strong retail sales in the U.S., record sales in China and a continued emphasis on improving the performance of our operations worldwide. We'll continue to focus on driving profitable growth and leveraging our technical expertise to lead in the future of personal mobility."
About 90% of pretax profits at GM came from North America, where a continuing replacement cycle coupled with demand for higher-margin trucks and sport-utility vehicles benefited the bottom line. North American profit margins hit 12.1% in the quarter, up from 10.5% in the same period a year prior.
The report continues a strong run of earnings for General Motors, which is riding pent-up demand coming out of the Great Recession that has led to near-record U.S. sales figures. But for all of the good results, GM investors have little to show for it. Shares of the automaker traded at $32.10 on Thursday afternoon, barely moved compared to its $31.50 close a year ago on this day.
The shares have been stymied in a range of factors including litigation fears and, more recently, concerns about what impact a slowdown in China or Brexit fears could have. GM internationally reported strong results in the second quarter, with its European operation posting its first quarterly profit since 2011 and China contributing $500 million in net income.
TheStreet's Jim Cramer noted that a major theme among companies reporting this quarter has been that Europe has been a positive. "Europe is coming back and people should recognize that because it's an upside surprise," he said.
Strength internationally should offset another, more broad concern that has been lingering over GM: the idea that U.S. sales are peaking and that the oversized results in North America are unlikely to last in this highly cyclical industry. There has been some concern that discounting is on the rise among automakers, a potential sign of weakening demand, though GM officials said Thursday that any abnormal discounting or incentives in the second quarter was focused on clearing out aging inventory ahead of new model launches.
Cramer called the GM results "a really, really good quarter," adding "this was not a peak auto number."
There is reason for hope that even if the U.S. market is near a plateau it won't start crashing down any time soon. The U.S. consumer remains relatively healthy, gasoline though off the lows is still inexpensive and interest rates remain low, factors that traditionally have helped fuel sales. The average age of a car on the road today is still high by historical standards, and while that in part is a testament to the fact that vehicles are made better today than they were in years past, it still suggests no lack of a pool of potential buyers.
There are potential headwinds to keep in mind. A U.S. Circuit Court of Appeals earlier this month gave the go-ahead to plaintiffs wishing to sue GM over pre-bankruptcy crashes stemming from a faulty ignition, potentially exposing the company to additional liability. And international concerns remain: GM warned that the strong dollar, coupled with economic uncertainty relating to Brexit, could cut European results by upwards of $400 million in the second half of 2016.
Still those issues seem to be minor speed bumps for a company that appears to have hit cruising speed. GM has spent the better part of this decade trying to convince investors that it truly was transformed during its government-assisted bankruptcy, and is no longer the plodding giant it once was. A continued run of quarters like this will go a long way toward making that case.