Mix is margin. That is my favorite auto industry cliché. It actually applies to other consumer goods, but there is nowhere where it is more obvious than in auto financial statements. So, having done virtually nothing but analyze auto financial statements for 11 years of my life (sorry, ladies) I was once again gobsmacked by the market's reaction to General Motors's (GM) earnings this morning.
Good analysts should have seen this coming. GM's market share performance was actually fairly mediocre in the quarter, with the flagship GM North America Operations posting an 11.4% decline in unit sales for the quarter. GM still makes a lot of cars that people just don't want to buy. It is what it is. But GM also makes the pickup trucks and SUVs that American customers REALLY want to buy, and hence the blow-out earnings performance this morning.
This is where the auto background really comes in handy. GM North America's wholesales of cars actually fell less than 1% in the quarter, a much better performance than the 11.4% unit sales decline. Remember, except in extremely rare cases, GM doesn't own its dealers, so revenues are recognized when the vehicle leaves the plant, not when the keys land in your pocket. Those numbers tell us that GM dealers were short of inventory during the quarter, not surprising given the second quarter's Covid-19-related plant shutdowns.
As for any consumer goods company, refilling the distribution channel tends to produce better operating margins. GM was filling its sales channel, and also filling it with high-margin trucks and SUVs. It's apparent in the fact that GMNA's revenues rose $1.1 billion year on year (about 4%) in the quarter despite the lower wholesales. Mix is margin, baby.
And that's where GM knocked the ball out of the park. GMNA's adjusted EBIT in the quarter was $4.4 billion versus $3.0 billion in 3Q2019. The corresponding margin was 15.0% versus 10.8%. Yes, profits are variable at automakers (including Tesla (TSLA) , when you actually separate all the dross from the real numbers) but when they are varying in the company's favor, that company will be feted in the financial media.
This is fun, isn't it? This is what analysts (grown-ups) do, while others talk about "disruption" and lionize "visionaries" like Elon Musk from their living rooms. I can't tell you how little their "research" means to me.
But, as anyone who has ever watched a mob movie knows, you need to get yours. Ya gotta kick a taste up to Paulie. So when do GM shareholders get their taste? I have no idea what is going to happen with this election, but I know that GM's adjusted EPS of $2.78 in 3Q greatly exceeded GM's dividend rate of $0.00. Yes, GM cancelled its dividend in late April after paying $0.38 per quarter for the preceding 17 quarters.
But I don't see that changing materially, sadly. GM CEO Mary Barra has become a card-carrying member of the disruption generation. With a growing investment in autonomous vehicle company Cruise and the cost of mass-marketing the upcoming Hummer EV, I see GM adopting a capital allocation strategy similar to the Silicon Valley tightwads.
Not receiving a dividend is disappointing for those who have held GM through the bad times, but it is the way stocks are evaluated these days. GM is going to keep generating boatloads of cash, both from automotive operations and the incredibly valuable GM Financial.
When will shareholders see that? I don't think they will, and that's why I believe l GM stock is still an "avoid" after such a profitable quarter.
It pains me to say that, but it is still a car company, after all. Who cares about cash flow?