GM Earnings Preview: Understand how buy backs could supersede earnings
General Motors (GM) is set to report its Q3 2024 earnings tomorrow morning, with analysts expecting adjusted EPS to grow 4% year-over-year to $2.38 and revenue to rise 1.2% to $44.67 billion. Adjusted EBIT, a key metric, is anticipated to be closely watched as the company maintains its full-year guidance of $13-15 billion. GM has a strong track record, having beaten EPS estimates for eight consecutive quarters, and investors will be looking for insights into its performance amid ongoing challenges in the EV market and China.
In Q2, GM reported robust results, with adjusted EBIT jumping 37% year-over-year and 15% sequentially to $4.44 billion, driven by higher volume, stable pricing, and reduced EV inventory allowances. Trucks and SUVs, particularly models like the Chevrolet Silverado and GMC Sierra, continued to drive results, with midsize pickups like the Chevrolet Colorado and GMC Canyon posting a 31% increase in sales. GM also surprised with a 40% year-over-year increase in U.S. EV deliveries, with a goal of reaching 200,000-250,000 EV units for the full year. However, China remains a significant headwind, as excess capacity and competition weigh on profitability.
Looking ahead, analysts are cautious about the second half of the year, with expectations for softer North American margins and continued challenges in China. EV sales, while growing, may pose a margin headwind as GM scales production of models like the Chevrolet Equinox EV. The company’s inventory levels of internal combustion engine (ICE) vehicles remain strong, which could provide some buffer against EV margin pressures. Overall, investors will be looking for updates on GM's cost management, pricing strategy, and its ability to navigate the evolving automotive landscape as it heads into the final months of 2024.
At its Investor Day on October 8, General Motors (GM) stated that it anticipates its financial performance in FY25 to be similar to FY24, which disappointed some investors hoping for more significant growth. Although GM recently raised its FY24 financial targets, challenges like the ongoing restructuring of its China business and competition from local EV makers may continue to weigh on results in FY25. The company remains on track to produce approximately 200,000 GM-branded EVs in North America this year and expects its portfolio to reach positive variable profit in the current quarter.
GM also noted that EV losses likely peaked this year, which is a positive sign, but the path to profitability remains challenging due to weakened consumer demand and ongoing concerns about range anxiety. While GM is developing more EVs with a range of over 300 miles, the pricing of these vehicles could still hinder wider adoption. On a positive note, the company is also in the process of launching eight new or redesigned ICE SUVs in North America and expects to reduce its outstanding shares to under 1 billion by early next year. Additionally, its Cruise division has commenced driverless testing in Houston.
One area that investors need to be aware of its the company's buyback plan and how it could impact valuations. General Motors has a trailing 12-month buyback yield of 21%, reflecting its aggressive share repurchase program. The company began its buyback efforts in 2023, announcing a $10 billion accelerated repurchase plan, followed by an additional $6 billion in June 2024. These repurchases have significantly reduced GM's share count, from over 1.3 billion in Q3 2023 to around 1.1 billion by the end of Q2 2024, with expectations to dip below 1 billion shares by early 2025. This reduction has contributed to a nearly 30% increase in GM's stock price so far this year, although the company's market value has only increased by 10%.
The buybacks have the potential to boost GM's valuation over time by increasing per-share earnings and free cash flow. With plans to continue allocating about 75% of its free cash flow to repurchases, GM could spend approximately $6 billion annually on buybacks over the next few years. This could theoretically retire about 60% of its stock over nine years, assuming consistent free cash flow and stable market conditions. As a result, per-share free cash flow could grow from $8 in 2025 to about $22 by 2033, representing a 12% average annual growth rate, further enhancing shareholder value.
General Motors has entered into a joint venture with Lithium Americas to develop the Thacker Pass lithium project in Nevada, contributing $625 million in cash and letters of credit. GM will acquire a 38% ownership stake in the project, including $430 million in direct cash funding to support construction and a $195 million letter of credit facility for reserve account requirements. This new joint venture replaces the $330 million equity investment commitment from GM's original agreement in January 2023 and complements the $2.3 billion U.S. Department of Energy loan commitment announced earlier this year. Investors will want an update on its plans for this investment.