GM Beats Consensus; Raises Dividend
General Motors (GM:NYSE) posted very strong fourth- quarter results and the stock is up 5% on the news. Earnings strength came from North America, an unexpected profit in South America, slightly higher results in Europe and strong China sales. And the margin story is progressing like I thought it would -- globally, margins were ahead in every region on stronger pricing. Of note, the company’s North America margin, at 8.7%, continues to make progress and gives credence to management’s target of 10% by 2016, driven by product launches, pricing and more efficiencies from common platforms.
Management also reiterated all of its long-term targets - - for earnings, cash flow, and margins -- as well as its $13.2 billion capital deployment plan. Lastly, GM raised the dividend by 20%, which now puts the yield at a very attractive level of around 4.24%. I view the dividend news as very positive, especially after the company didn’t take action at the Detroit Auto Show, and given that it was at the high end of expectations.
Fourth-quarter earnings per share came in at $1.19 vs. consensus at $0.83. Lower taxes helped, but strong operations were also an important factor in the beat. Total company adjusted EBIT was at $2.4 billion, higher than the $2.1 billion expectation. North America EBIT at $2.2 billion was the largest contributor and margins were slightly ahead at 8.7%, compared to the 8.6% consensus. Europe EBIT fell $393 million, which was in line but produced better margins -- still a 7.3% decline but better than the 8% drop that was expected. International EBIT was $396 million, higher by $100 million, with strong China results. South America swung to a gain of $89 million and better margins of 2.4% vs. expected declines.
Automotive free cash flow was $1.8 billion in the quarter and would have been $2.4 billion if not for recalls. Keep in mind that the company’s free cash flow guidance for this year is flat from 2014, so expectations are low and the potential for upside is real given that last year saw a record level of recalls, which should abate somewhat.
Overall, I like the product cycle story, the upcoming new launches and continued strong market share growth. I believe the U.S. and China markets will remain the growth drivers, with wider margins in both regions, and that the icing on the cake will be the turn in Europe (possibly sooner than later) and continued improvement in South America.
With a strong balance sheet, an 8x EBITDA multiple and a now 4.2% dividend yield, the stock remains attractive. The shares are still down 15% from their December 2013 highs, so there is still a lot of room to run.