Morningstar

General Motors Earnings Show Continued Chip Shortage Woes, But Second Half Should Show Improvement

GM stock is significantly undervalued with a fair value estimate of $70.

General Motors logo superimposed atop the world headquarters building.
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General Motors Co
(GM)

General Motors’ (GM) second quarter suffered from about 95,000 lost unit sales (about 75% of which are SUVs and pickups) for vehicles partially built due to the chip shortage. GM disclosed this on July 1 and confirmed 2022 guidance, which it reconfirmed on July 26. About 15,000 of these vehicles have been wholesaled in July; the rest should be shipped to dealers, and in turn booked as revenue, by year-end. We estimate an over $600 million EBIT headwind from this issue, which along with China on COVID-19 lockdown most of the quarter caused diluted earnings per share of $1.14 to miss the Refinitiv consensus of $1.19. We were concerned about a massive working capital headwind from the unfinished vehicles, but adjusted auto free cash flow still was $1.4 billion, albeit down 43% year over year.

We see nothing in the results to merit changing our fair value estimate from $70. GM still expects an excellent second half with adjusted auto free cash flow of at least $5.6 billion to meet full-year guidance of $7 billion-$9 billion.

CEO Mary Barra’s letter did mention that GM is thinking about a possible economic downturn and has modeled many scenarios while also cutting discretionary spending and limiting hiring to growth or critical needs (the latter likely primarily means electric or autonomous vehicles). If a recession comes, we don’t see GM’s results being severely hurt for more than about one quarter, as pricing tailwinds would abate quickly and working capital would suffer if the chip shortage were mostly over at that point. GM cut about $4.5 billion in fixed costs in restructuring that ended in 2020 and has exited unprofitable markets such as Europe, Australia, and most of Asia. We think the chip shortage has caused U.S. autos to be at severe recession levels already, so a recession after the shortage ends will in our view mean higher U.S. auto sales than present industry levels; this along with $33 billion in automotive liquidity suggests GM could adequately handle a recession.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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