We Take Optimism From GM Not Lowering Its Guidance
We are not changing our GM fair value estimate following what we see as a solid first quarter and one that could have been much worse given U.S. inflation, high commodity costs, and ongoing supply chain issues reducing vehicle production.
We are not changing our GM fair value estimate following what we see as a solid first quarter and one that could have been much worse given U.S. inflation, high commodity costs, and ongoing supply chain issues reducing vehicle production. The buyout of SoftBank’s stake in Cruise (see our March 20 note) means the autonomous vehicle business will now be consolidated in GM’s tax returns, which means a lower overall tax rate now expected of about 20% versus 22%-24%. This change caused GM to raise its 2022 adjusted diluted EPS guidance by $0.25 on each end to $6.50-$7.50. Given the headwinds we mentioned, we were concerned GM would lower its guidance, but the total company adjusted EBIT outlook remains $13 billion to $15 billion and adjusted automotive free cash flow remains $7 billion to $9 billion. The latter has a long way to go in the final three quarters given it was just $6 million in the first quarter. Still, the metric improved from a $1.9 billion burn in first-quarter 2021 thanks mostly to a $2.4 billion improvement in working capital, likely from inventory.
Management remains confident in its supply chain to still grow wholesale units 25%-30% from 2021 (up 1.2% in the first quarter) and CFO Paul Jacobson said that pricing is better than expected so far this year. This is good news because GM’s $2.1 billion year-over-year pricing tailwind was more than offset by $2.5 billion in cost increases, so GM needs all the pricing benefits it can get this year. Cost increases are from commodities and shipping and we don’t expect much relief this year, plus GM continues to invest for its software and an all-electric vehicle future. Commodity and logistics cost headwinds totaled $1 billion in the quarter. CEO Mary Barra announced on the earnings call that senior management will now have some of its compensation tied to EV performance targets. There was no update on capital allocation and we continue to predict that the dividend is not coming back, at least not on a regular basis.
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