General Motors' Margin Marvel and the Road to EV Dominance

General Motors' second-quarter 2024 results underscore a pivotal shift in its financial health, driven by margin expansion and strategic capital allocation that could cement its position as an EV leader. With North American operations firing on all cylinders and investments in battery technology accelerating, GM is proving it can turn its vision of an all-electric future into profitable reality—despite lingering challenges in key markets like China.

The Margin Turnaround: North America's Engine of Profit

GM's Q2 2024 EBIT-adjusted margin of 9.3% marked a dramatic improvement from 7.2% in the same period last year, with North America leading the charge. The GMNA division's EBIT-adjusted margin surged to 10.9%, up from 8.6%, thanks to strong SUV and truck sales and cost discipline. This margin expansion isn't just a blip—it's a reflection of GM's ability to price premium vehicles in a market still favoring combustion engines, while also absorbing the upfront costs of EV production.

The question for investors is whether this margin resilience can persist as EVs scale. GM's confidence suggests it can. CEO Mary Barra and CFO Paul Jacobson have repeatedly emphasized that the Ultium battery platform's economies of scale will eventually lower EV production costs. For now, the profits from gas-guzzling trucks subsidize the transition, a strategy that appears sustainable given the segment's enduring demand.

Capital Allocation: Betting Big on Batteries

GM's capital spending guidance for 2024—$10.5 billion to $11.5 billion—reveals where its priorities lie. A significant chunk is allocated to battery cell manufacturing through joint ventures like Ultium Cells LLC, which aims to produce 100 gigawatt-hours of batteries annually by 2025. This isn't just about reducing reliance on Asian suppliers; it's a bet that vertical integration will give GM a cost advantage over rivals like Tesla and Ford, which still depend on external battery suppliers.

The payoff could be enormous. Analysts estimate that self-made batteries could cut EV production costs by 15-20%, a margin boost that would make GM's electric vehicles competitive with internal-combustion models—a critical threshold for mass adoption.

The China Dilemma: A Speedbump or a Detour?

While GM's domestic success shines, its China division—a once-vital growth engine—has stumbled. Equity income there fell by $210 million year-to-date, reflecting slowing demand and pricing pressure as Chinese automakers like BYD dominate the EV market. This isn't a dealbreaker yet: China contributed just 11% of GM's global revenue in 2023, down from 20% five years ago. But it's a reminder that GM's future hinges on North America and Europe, where its EV lineup—including the Hummer EV and Cadillac Lyriq—is gaining traction.

EV Market Positioning: GM's Play for the Long Game

GM's strategy differs starkly from Tesla's. While Tesla relies on software and direct sales, GM is leveraging its dealership network and brand equity to push EVs into mainstream markets. Its partnership with Honda to co-develop EVs and share platforms adds another layer of cost efficiency. The result? GM now has 35 EV models in the pipeline, targeting every segment from compact crossovers to heavy-duty trucks.

Investors should watch two key metrics: the time it takes for EVs to contribute meaningfully to GM's margins and the pace of battery cost reductions. If GM can achieve a 10% EBIT margin on EVs by 2026—a goal Barra has cited—the stock could see a revaluation.

The Investment Case: Buy the Dip, but Beware the Risks

GM's stock has underperformed the broader market over the past year, trading at 8.5x its 2024 EPS guidance of $10. This valuation seems reasonable if the company meets its free cash flow targets of $11.5 billion by year-end. However, the risks are clear: China's downturn could deepen, EV production costs may not fall as hoped, and competition from startups like Lucid could intensify.

For now, the margin gains in North America and the clarity of GM's capital allocation suggest it's a safer bet than many EV-focused peers. Investors should consider adding GM to a diversified portfolio, particularly on dips below $35—a level that would represent a 20% discount to its 52-week high.

In the end, GM's Q2 results aren't just a snapshot of profitability—they're a roadmap. If the company can convert its gas-powered profits into EV scale without sacrificing margins, it might just drive the industry toward a future it's already helping to design.