Morningstar

GM Earnings: Guidance Increase and Strong Demand Do Not Indicate an Automotive Recession

GM enjoying robust pricing power; stock undervalued.

General Motors logo superimposed atop the world headquarters building.
Securities In This Article
General Motors Co
(GM)

GM Stock at a Glance

  • Fair Value Estimate: $78.00
  • Star Rating: 5 stars
  • Uncertainty Rating: High
  • Economic Moat Rating: None

GM Earnings Update

We are not changing our GM GM fair value estimate after the company’s first-quarter, adjusted diluted EPS rose 5.7% year over year to $2.21, beating Refinitiv consensus of $1.73.

We continue to believe U.S. autos have mostly been in recessionary levels since spring 2020, so, even if the U.S. enters a recession, we expect continued rising industry volumes as the chip shortage gradually improves and possibly ends by the end of this year or early 2024.

GM continues to enjoy robust pricing power with the variable contributing $1.6 billion to adjusted EBIT in the quarter, and GM North America’s adjusted EBIT margin rising 20 basis points to 10.9% is a good sign. Also encouraging is GM raising its full-year guidance with adjusted diluted EPS now guided to $6.35-$7.35 from $6-$7. The increase is from pricing not yet moderating as much as management originally thought; $2 billion in previously announced cost reductions across 2023-24 will now be about half realized in 2023 (up from about one third) following buyouts mostly in North America, and demand remains strong and skewed to the highest vehicle trim levels. Management sees second quarter to be weaker than first quarter, though, due to pricing expected to moderate and steel and commodity costs are not going down as much as expected.

Adjusted automotive free cash burn of $132 million on higher year-over-year working capital and capital expenditure did not stop management from repurchasing $369 million of stock and we’d welcome more buybacks with the stock well below our fair value estimate. Full-year adjusted auto free cash guidance also rose to a midpoint of $6.5 billion from $6 billion. We see automotive liquidity of $34.9 billion, including $21.4 billion of cash and securities, allowing continued investment for the future.

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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