General Motors Co. (GM, Financial) announced second-quarter earnings that handily beat Wall Street expectations on the earnings front, but missed the top line by a wide margin. But the stellar operating results, which saw GM’s margins improve, did nothing to help the fortunes of the stock, which declined 0.7% by Tuesday’s close.
Fears about rising inventories and slowing U.S. auto sales continue to weigh heavily on General Motors, which has been concentrating on improving its operational performance and margins this year by exiting several markets and selling off select overseas units.
GM’s reported second-quarter revenues of $37 billion, compared to $37.4 billion in the prior period. Although the 1.1% drop looks small, Wall Street was expecting GM to post $40.1 billion. Normally, such a wide miss on the revenue front would have caused the stock to plunge, but the company saved itself by improving its operational metrics. GM reported a 10% EBIT-adjusted margin bump compared to the 0.3% drop the company reported during the year-ago period.
Source: GM Q2-17 Earnings Release
The U.S. has always been the chief breadwinner for General Motors, and the company’s decision to exit markets like India and South Africa has now made its dependence on this market even greater. GM has decided to keep its focus on the two largest markets in the world, the U.S. and China. During the second quarter, GM delivered 725,000 vehicles in the U.S. and a record 852,000 vehicles in China.
Source: GM Sales Report
According to the sales table above, combined sales from North America and China were 3,460,378 vehicles during the first half of this year, accounting for nearly 73% of its overall vehicle sales. Although there are pros and cons to any approach, GM is clearly moving toward reducing the number of markets it wants to compete in, cutting its losses and concentrating on select markets that are profitable.
Excerpt from GM’s press release on restructuring:
"In May, GM announced key restructuring actions in GM’s International Operations to focus GM India on export manufacturing and the transition of GM South Africa manufacturing to Isuzu Motors. The Chevrolet brand will be phased out of both markets by the end of 2017.
With these actions and the pending sale of GM’s Opel / Vauxhall brands and GM Financial’s European operations to PSA Group, GM believes it is now in the right markets to capitalize on its higher return franchises and long-term growth opportunities, including reshaping the future of personal mobility."
GM’s current actions will take a long time to bear fruit, but by pruning the number of markets it is operating in, the company is allowing itself to compete more fiercely in fewer markets. It will not only help the company improve its sales numbers over time, but will also help improve margins in the long run.
Considering its dependency on the U.S. market for bringing in operating income, however, and factoring in the slowdown in the auto market, none of those future expectations are going to make much of a difference for GM’s stock price. Despite rising 15% in the last year, GM continues to trade with a bond-like yield of 4.27%. And the way the stock traded after the second-quarter earnings were released, it is clear the stock will remain under pressure for the rest of the year.
Disclosure: I have no positions in the stock mentioned above and have no intention of initiating a position in the next 72 hours.
