Morningstar

We Take Optimism From GM Not Lowering Its Guidance

We are not changing our GM fair value estimate following what we see as a solid first quarter and one that could have been much worse given U.S. inflation, high commodity costs, and ongoing supply chain issues reducing vehicle production.

Securities In This Article
General Motors Co
(GM)

We are not changing our GM fair value estimate following what we see as a solid first quarter and one that could have been much worse given U.S. inflation, high commodity costs, and ongoing supply chain issues reducing vehicle production. The buyout of SoftBank’s stake in Cruise (see our March 20 note) means the autonomous vehicle business will now be consolidated in GM’s tax returns, which means a lower overall tax rate now expected of about 20% versus 22%-24%. This change caused GM to raise its 2022 adjusted diluted EPS guidance by $0.25 on each end to $6.50-$7.50. Given the headwinds we mentioned, we were concerned GM would lower its guidance, but the total company adjusted EBIT outlook remains $13 billion to $15 billion and adjusted automotive free cash flow remains $7 billion to $9 billion. The latter has a long way to go in the final three quarters given it was just $6 million in the first quarter. Still, the metric improved from a $1.9 billion burn in first-quarter 2021 thanks mostly to a $2.4 billion improvement in working capital, likely from inventory.

Management remains confident in its supply chain to still grow wholesale units 25%-30% from 2021 (up 1.2% in the first quarter) and CFO Paul Jacobson said that pricing is better than expected so far this year. This is good news because GM’s $2.1 billion year-over-year pricing tailwind was more than offset by $2.5 billion in cost increases, so GM needs all the pricing benefits it can get this year. Cost increases are from commodities and shipping and we don’t expect much relief this year, plus GM continues to invest for its software and an all-electric vehicle future. Commodity and logistics cost headwinds totaled $1 billion in the quarter. CEO Mary Barra announced on the earnings call that senior management will now have some of its compensation tied to EV performance targets. There was no update on capital allocation and we continue to predict that the dividend is not coming back, at least not on a regular basis.

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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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