General Motors (GM) stock is trading up almost 10% Wednesday in immediate reaction to solid third-quarter adjusted earnings of $1.87 per share, above the $1.25 consensus, combined with excellent full-year guidance of $5.80 to $6.20 for adjusted EPS.
So how did the company arrive at these numbers?
This is where it gets interesting. Any analysis of the automotive industry has to start by looking at unit sales. In GM's case, that was a minor disaster for Q3:
North America: Down 9.8%
Europe: Down 98.9% (Opel was sold last year)
China: Down 14.9%
Other: Down 6.6%
TOTAL: Down 14.7%
And what about the brands?
Chevrolet: Down 8.3%
Buick: Down 17.1%
GMC: Down 10.5%
Cadillac: Down 3.9%
Holden: Down 33.5%
Baojun: Down 24.1%
Wuling: Down 0.6%
Other: Down 77.4%
Ugh! Every single geography: Down. Every single brand: Down.
When unit sales are down, that's a major headwind in arriving at strong EPS results that cause the stock to shoot up by almost 10%. So how do we bridge those facts?
- Improved sales mix (SUVs, trucks).
- Operational efficiency.
Let's start with mix. Inside all of the brands, such as Cadillac, Chevrolet and Buick, sales are tilting heavily in favor of SUVs at the expense of smaller cars and sedans. Recent major sales successes include Chevrolet Traverse, Buick Enclave and Cadillac XT5 -- all SUVs. Buick and Cadillac sedan sales are in a downward spiral.
Then add the pickup trucks, which is in many ways GM's crown jewel. The third quarter saw the introduction of the all-new 2019 Chevrolet Silverado and GMC Sierra, and they are flying off dealer lots and getting stellar reviews -- just like GM's SUVs. Combine that with GM's midsize pickup trucks -- Chevrolet Colorado and GMC Canyon -- and you have a winning formula for improving GM profitability.
That's why the disastrous unit sales volumes in Q3 didn't matter so much -- for now. The sales mix was vastly improved.
Americans, in particular, want SUVs and pickup trucks -- not cars and electrics. Pickup trucks and SUVs are the most profitable products, whereas cars and electrics are at the opposite end of the profitability scale.
The other issue is operational efficiency. GM in recent years is not the managerial problem-child we saw for at least 30+ years leading up to 2005-2010 or so. There is now discipline all the way from development to manufacturing to sales. These improvements continue to yield dividends for GM's income statement, and this Q3 report is just the latest installment in this trend.
Longer term, though -- looking into 2019 and beyond -- at some point GM must arrest the sheer unit volume declines. There is not a single glimmer of hope in Q3 from a single geography or brand, when it comes to unit sales trends.
Of course, under the surface of the overall brands, there are stars as I mentioned above: SUVs and pickup trucks. That's where GM's profits reside.
Let's hope that aggressive anti-car policies by the U.S. and other governments, that require or otherwise incentivize electric cars at the expense of SUVs and pickup trucks, don't destroy GM's only source of meaningful profits in the years to come.
If you want to best predict GM's long-term profit trajectory, look to government policy. For GM to sustain itself, it should fight tooth and nail to keep the government's greasy fingers away from telling it what products to build, and what products the consumer should buy.
A planned economy never worked out for automakers in any other geography or the history or the world, whether in the old Soviet Union, or in Venezuela today.
