General Motors reported earnings on Tuesday, and they beat analysts expectation by a solid margin.
“They were better than good, they were great,” CFO Chuck Stevens told Business Insider in an interview.
Stevens added that GM’s profit margins for five of the past six quarters have been above 10%, and the automaker continues to forecast a “10-plus-per cent” margin for 2016.
Wall Street doesn’t care: GM shares were down 4% in trading in Tuesday, to $32. Year-to-date, the stock is down about 6%.
Two concerns are depressing investor sentiment toward GM and the US auto industry: lack of discipline on incentive spending, which undermines profits; and a plateauing market for sales, at a level of around 17.5 million vehicles.
Stevens straightforwardly addressed the incentive issue. “We’re seeing incentive spending starting to moderate in October,” he said, adding that he expects incentives to continue to moderate through the fourth quarter.
He acknowledged that the industry is becoming more competitive in the US, especially where trucks are concerned. But GM also said that the average transaction price for the quarter was $35,700, $5,000 higher than the industry average. The automaker also has a bevy of new crossovers and trucks launching next year, providing the products that are in the US both the most popular among customers and profitable for the automaker.
The markets are supposed to be a predictor of the future, so if a downturn looms in 2017, then that explains why GM shares are going nowhere: the inevitable decline is being priced in.
But GM has also said that its break-even point in the US can tolerate a decline to a 10-11 million annual sales environment, which would be a cataclysm. That’s not going to happen, so a run-of-the-mill decline to around 15-16 million would still enable GM to remain quite profitable, as long as trucks and SUVs keeping selling.
The bottom line is that the market is afraid of something that it doesn’t need to fear.
This could be considered an understandable working through of various financial concerns, except that GM has made shareholder value a core business concern. Dividends and share buybacks are keeping the stock attractive to some investors, but some on Wall Street are worried that GM isn’t holding enough cash on its balance sheet (currently about $16 billion) and could stockpile more, rather than dispersing its free-cash flow to investors, with the goal of maintaining $20 billion in cash available from various sources.
GM’s management has brought it to this favourable position, less than a decade after the automaker was bailed out by the US government and went bankrupt before returning to the public markets. And GM executives have told me that whining about Wall Street is “old GM” — the new company has to show the markets that it can deliver growth.
Earnings growth has obviously been delivered. But if the stock doesn’t start to move up more than it has, management could come under fire, ahead of the questions that will invariably be asked when a downturn actually arrives. GM doesn’t need management change by any stretch right now, and that’s why Wall Street’s attitude is becoming alarming.
Companies that are consistently beating expectations deserve to be rewarded. And for GM and the rest of the US industry, that isn’t happening.
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