General Motors (GM, Financial) blew past earnings estimates during the fourth quarter, posting earnings per share of $1.28 and revenue of $43.91 billion while the market was expecting earnings per share of $1.17 and revenue of $41.53 billion.
Net revenue for the quarter surged by 10.8% during the quarter as adjusted operating margin for full fiscal 2016 was a healthy 7.5%, slightly better than the 6.7% operating margin Ford (F, Financial) recorded for the same period.
Unlike Ford, whose operations in Europe turned profitable recently, General Motors is yet to turn things around in one of the most critical markets. North America and the International segment, which includes China, were the only two profitable automotive regions for General Motors in 2016.
General Motors’ EBIT-adjusted operating profits expanded nicely this year, touching $12.53 billion compared to $10.814 billion last year. With the U.S. contributing $12 billion to operating profits, GM’s financial and stock performance are closely tied to one single market.
General Motors’ stock price shot up by 35% in the last 12 months, but it is still trading at a lowly 5.8 times earnings and 0.34 times sales. The stock was extremely undervalued and continues to remain under severe pressure due the state of the U.S. auto market.
With auto sales in the world’s largest auto market hovering near all time-highs, the chance of it reaching even higher levels is slim. If sales moves sideways, the possibility of sales growth goes out the window, and that’s the primary reason why GM and Ford stock prices are under extreme pressure.
Neither carmaker has anyone else to blame. General Motors sold 3.63 million vehicles in North America, 1.207 billion in Europe, 4.87 billion in APAC, the Middle East and Africa and another 584,000 in South America. Though Europe is only one-third compared to the U.S. in terms of sales volume, GM needs to start posting operating profits in this region as quickly as possible. Until that happens, no matter how big its earnings beat is, the stock will continue to trade at low multiples.
General Motors expects to maintain its current performance or do slightly better in 2017. Considering the current situation that’s a great place to be.
“GM expects to deliver full-year 2017 EPS-diluted and diluted-adjusted of $6.00-$6.50; maintain or improve EBIT-adjusted and EBIT-adjusted margin; and generate higher revenues, compared to 2016.” – General Motors Press Release
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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