General Motors Company’s (NYSE:GM) second-quarter results were anything but mixed. The automaker provided Wall Street with better-than-expected profit and sales growth, as well as a hike to its full-year outlook, prompting a quick pop in GM stock.
As GM earnings prove, reports that we’re at the top of the car-buying cycle continue to be premature. GM stock can’t get any multiple expansion because of this, and yet results continue to offer pleasant surprises in what’s supposed to be a waning market. Certainly Wall Street wasn’t prepared for such robust earnings. Indeed, there was every reason to expect a mixed report from General Motors, with solid earnings growth being offset by lackluster sales.
It didn’t happen. Taking a page from the same playbook it has been running throughout the cycle, GM’s performance was based on sales of higher-margin pickup trucks and large SUVs in North America. Indeed, General Motors’ home region accounted for more than 90% of pretax earnings came from North America, helped by profit margins that expanded to 12.1% from 10.5% last year.
Europe continued its trend of improvement — the region posted a profit for the first time in five year — but General Motors warned investors not to get too used to it. Market disruptions and unfavorable foreign exchange triggered by Brexit could cost European operations $400 million in the second half of the year.
GM Stock: Enjoy the Rally While It Lasts
For the most recent quarter,General Motors net income rose to $2.87 billion, or $1.81 a share, up from $1.1 billion, or 67 cents a share, a year ago. On an adjusted basis — which is what the Street cares about — earnings were $1.86 per share. That crushed analysts’ average estimate of $1.49 a share, according to a survey by Thomson Reuters. Revenue increased 11% to $42.4 billion from $38.2 billion in the year-ago quarter to leapfrog over the Street estimate of $38.93 billion.
Most importantly of all, General Motors lifted its outlook. For the full year, GM sees adjusted earnings of $5.50 to $6.00 a share, vs. prior expectations of $5.25 to $5.75 a share.
Shares popped on the beat-and-raise General Motors earnings report, but global macroeconomic headwinds and hand-wringing over the top of the car-buying cycle will likely remain a headwind. In other words, it’s far too soon to say whether this report can be the catalyst for protracted upside in GM stock.
But that’s OK. The appeal of GM stock is the value it affords investors patient enough to hold it through multiple cycles, and today’s results strengthen the case that General Motors is a long-term hold.
After all, with a price-to-earnings multiple of 5.4, it’s clear that sentiment is not on GM’s side even though it has a five-year growth forecast is 14% per annum. If GM keeps stringing together these kind of quarters on top of what looks like a bargain-basement valuation, the market is eventually going to change its tune.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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