The performance of General Motors (GM, Financial) was relatively disappointing in the first quarter of the year. Net revenue declined by 3.1% to $36.1 billion, with net income being down 58.7% at $1.1 billion. The decline was mostly due to a $0.9 billion pre-tax charge related to restructuring in Korea, while a planned drop in pick-up truck production was also a contributing factor.
Despite its falling sales and profitability, the company is on track to meet guidance for the full year. It expects adjusted Ebit and automotive free cash flow to be at similar levels to those recorded in 2017. New products are set to contribute to its financial performance and help to offset higher costs on new technologies and product launches.
Changing outlook
Since its first quarter results were released, the GM stock price has moved around 3% higher. This takes its gain to 9% in the last year, which is behind the S&P 500’s increase of 13% in the same time period.
In the long run, a key catalyst for GM could be autonomous vehicles. They are expected to have a significant impact upon the automotive industry. It is estimated that by 2040 there will be 33 million driverless vehicles sold per year across the globe. This is due to represent over a quarter of all vehicles sold per year.
GM seems to be well-placed to benefit from the long-term growth trend in this area. It purchased self-driving technology start-up Cruise Automation in 2016. It has already included the company’s semi-autonomous technology in its products, and plans to release a fully autonomous vehicle in 2019. With the company having scalability that has allowed it to build 130 autonomous vehicles in the last year, its operational strength could allow it to more easily access the mass-market autonomous vehicles segment than some of its peers.
An investment of $2.25 billion from Softbank Vision Fund may provide GM with the capital required to launch its autonomous vehicles. Alongside its capabilities to capitalize on car-sharing through its Maven subsidiary, the prospects for the business in an autonomous vehicle marketplace seem to be encouraging.
New products
In the near term, new products could prove to be a major catalyst on GM’s financial performance. It is expected to release a new Chevrolet Blazer midsize crossover later in the year which will occupy the gap between the Equinox and Traverse. Both existing models have proved to be popular among consumers, which could improve the prospects of increasing sales from the new vehicle. Additionally, the Cadillac XT4 crossover is expected to prove popular among consumers, with more crossover vehicles potentially ahead in 2019 and in 2020.
Consumer demand for crossover vehicles continues to be high. They have proven to be highly profitable for the company, and have helped to offset slowing growth in other vehicle types in recent years. New products in this segment could help to boost the company’s market share and improve on past profitability.
Slowdown
While China has proved to be a key growth market for GM in recent years, its performance in the country was disappointing in the second quarter of the year. It recorded sales growth of 0.7%, which means that its growth for the first half of the year was 4.4%. This was partly due to a fall in Buick sales of 16.2% in the second quarter, which was surprising because of the brand’s successful track record of growth in previous years. The company did not provide an explanation for the fall in Buick sales, and a continued decline that hurts its overall performance could cause investor sentiment in the stock to come under pressure.
Despite this, the prospects for GM in China continue to be positive. Although the potential for a full-scale U.S.-China trade war continues to be present, the company has a 14% market share of what remains the world’s largest automotive market.
In the second quarter, its other brands enjoyed strong growth in China. For example, Chevrolet’s sales growth was 22.3%, while Cadillac grew its sales by 19%. Its low-cost brand Baojun saw sales rise by 6%, while new product launches in its Buick range could help to improve on the brand’s performance over the medium term. With multiple refreshed or new models across the GM product range due to be released in China by the end of 2018, its performance in the country could be set to improve.
Verdict
GM’s performance in the first quarter of the year was disappointing. Similarly, its sales growth in China in the second quarter of the year was less impressive than many investors had expected. The company looks set to improve its performance, however, with new vehicle launches ahead that could boost consumer demand for its products.
In the long run, the company appears to have a strong position in the autonomous vehicles segment. While it may take a number of years for this to catalyze its financial performance, it may cause investors to become more upbeat about its long-term prospects. After underperforming the S&P 500 in the last year, a turnaround could be ahead for the company over the medium term.
