It’s not as if investors weren’t aware the recently completed second quarter was going to look relatively weaker for General Motors Company (NYSE:GM). Auto sales have been slumping for a while now, and GM saw year-over-year sales slide all three months of the second quarter. The company also fell short of sales estimates in two of those three quarters.
That slowdown gave rise to two overarching questions: How much deterioration would we see in the bottom line, and what was fiscally plausible going forward?
As it turns out, investors didn’t seem terribly pleased. Shares were down after Tuesday morning’s release of the second-quarter numbers, which were at least partially a pleasant surprise.
General Motors Q2 Earnings Recap
For the quarter ending in June, General Motors turned $36.98 billion worth of revenue into operating earnings of $1.89 per share. In the same quarter a year earlier, GM cleared $1.79 per share (operating) on adjusted revenue of $37.38 billion. More important though, the Q2 results were mixed relative to analyst estimates, who had modeled a top line of $40.15 billion and a profit of $1.69 per share of GM stock.
Chairman & CEO Mary Barra commented:
“Disciplined and relentless focus on improving our business performance led to a strong quarter and very solid first half of the year. We will continue transforming GM to capitalize on growth opportunities and deliver even more value for our shareholders.”
On the other hand, the $1.5 billion the company spent buying back GM stock last quarter drove all of the per-share progress. Adjusted EBIT was down 4.3% to $3.7 billion, and EBIT margins were down 30 basis points to 10%.
Profits from its all-important North American division fell from $3.75 billion to $3.48 billion. The earnings contribution from its international and finance arms were up slightly, and the loss created by its South American division was significantly smaller, shrinking from -$118 million in the second quarter of 2016 to a loss of only $23 million this time around. Total vehicles sold worldwide fell from 2.39 million to 2.34 million, though it’s worth noting the company temporarily shut down some of its production lines during the quarter to retool.
The waning numbers reflect an ongoing contraction of the United States’ and the world’s automobile market.
To be fair, GM — along with Ford Motor Company (NYSE:F), Fiat Chrysler Automobiles NV (NYSE:FCAU) and all the other major manufacturers — are up against some very stiff competition … themselves. Last year, the industry sold a record-breaking 17.55 million automobiles, edging out 2015’s then-record of 17.47 million units.
With most consumers who are willing and able to buy a new car already in a relatively new car, the need or desire to purchase another one is understandably muted. As of the most recent look, the annualized pace of new car sales in the United States has scaled back to around 17.1 million.
That’s still a lot of vehicles by historical standards, but is less than satisfying to investors, who have more of a “what have you done for me lately?” mindset. In fact, that run rate of 17.1 million still arguably overstates actual organic demand for new cars and trucks.
Car companies’ dealers always offer some sort of incentive or price breaks to entice tire-kickers to actually put a new vehicle in their driveways. Those deals, however, have become uncomfortably generous. According to Autodata, June’s average incentive was up 12% on a year-over-year basis to just a little more than $3,600 per vehicle. In fact, the average incentive for each of the prior three months were considerably greater than the discounts and price-breaks being offered for the same three months of 2016.
General Motors wasn’t immune to this trend.
Looking Ahead for GM Stock
Prior to the release of the company’s second-quarter numbers, analysts were expecting General Motors to report income of $1.23 per share on sales of $36.9 billion for the quarter currently underway. For the whole year, those same pros were calling for a bottom line of $6.07 per share of GM stock and a top line of $157.18 billion.
All are lower than their year-ago comparisons, though all will likely be adjusted in light of General Motors’ second-quarter results and commentary.
Whatever the case, know that the headwind is likely to stiffen before it weakens, again by the company’s own hand. Not only are drivers increasingly disinterested in purchasing a new car now — as most of them have one that’s new enough — those consumers looking for a new vehicle are increasingly finding barely used cars at prices too good to pass up.
See, years of strong car (and truck) sales that peaked in 2016 and an inordinate number of fairly new lease turn-ins and trade-ins are forcing dealers to deeply discount used vehicles just to keep their lots from becoming overcrowded. Morgan Stanley thinks the average price of used cars could fall 20%, and maybe even as much as 50%, through 2021. Considering the cost and quick depreciation of a brand new car, number-crunching car buyers are having a tougher and tougher time justifying the purchase of a new one when a very nice one can be had for half the price.
Point being, don’t look for General Motors or GM stock to thrive in the foreseeable future despite last quarter’s partial beat. There are several cyclical kinks that still need to be worked out.
As of this writing, James Brumley held a position in Ford.