Morningstar

GM's Q2 Did Not Deserve the Stock Sell-Off It Triggered

We are leaving our fair value estimate in place because we see GM’s aggressive investment in an electric and autonomous future as more important than 2021 results.

Securities In This Article
General Motors Co
(GM)

We said in our June 16 note that we saw risk that the market may be disappointed by GM’s second half 2021 guidance and that has occurred with GM’s second quarter results. We are leaving our fair value estimate in place because, as we said on June 16, we see GM’s aggressive investment in an electric and autonomous future as more important than 2021 results. Second quarter adjusted EPS of $1.97 missed the Refinitiv consensus of $2.23 but we think the market found GM’s increased 2021 guidance to be well below expectations. Still, we don’t believe GM’s stock deserved to fall by 9% during Aug. 4 trading. New adjusted diluted EPS guidance is $5.40-$6.40 (versus Refinitiv consensus of $7.39) and up from $4.50-$5.25. We had been modeling $6.52 but now model $6.32. Total company adjusted EBIT is now guided at $11.5 billion to $13.5 billion, up from $10 billion to $11 billion and automotive adjusted free cash flow remains guided at $1 billion to $2 billion ($546 million in the first half).

We said on June 16 that we expected an EBIT guidance increase to at least $13 billion-$14 billion, so GM is not expecting as robust a second half as we thought. Key headwinds versus first half are GM estimating $1.5 billion-$2 billion in incremental commodity costs, about 100,000 units fewer wholesales in North America, up to $1.5 billion less GM Financial income as used vehicle prices have likely peaked and less leases terminate, $500 million in growth spending, and an assumed nonrepeat of about $400 million in mark-to-market gains on investments. The range of guidance is wider than before because management sees more uncertainty on COVID-19 issues in Malaysia affecting North American auto production and uncertainty around the semiconductor recovery. GM said it has $1.4 billion in partially completed vehicles awaiting chips as of June 30, but guidance assumes no held inventory. If this assumption proves incorrect, GM warned about “significant” cash flows moving to 2022 from 2021.

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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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