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Have General Motors' Earnings Peaked or Plateaued?

By John Rosevear – Oct 27, 2016 at 10:05AM

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The automaker's executives are still upbeat about the prospects for profits in the U.S., but investors are wary.

The Chevy Equinox is one of GM's best-sellers in the U.S. This all-new version is coming soon. Will it find a strong market? Image source: General Motors.

At first glance, you'd be hard-pressed to find much bad news in General Motors' (GM 2.19%) third-quarter earnings report on Tuesday morning. The Detroit auto giant posted record revenue and profit, blew away Wall Street estimates, and gave upbeat guidance for the remainder of the year. 

But some investors (or traders, at least) didn't see it that way. GM's shares fell sharply after the report was released, and closed down 3.8% on Tuesday. 

As of Thursday afternoon, GM's stock price hadn't recovered. What's the concern?

A great quarter, but was it the peak?

"General Motors had a spectacular, better-than-expected quarter in every measure," said Michelle Krebs, senior analyst at Autotrader. But, she said, "GM's performance comes from the North American market and truck sales, both of which are showing signs of plateauing." (Emphasis added.)

Krebs thinks that the market is going to get tougher for GM as the year comes to a close. She's not alone, because the evidence is growing: Already, GM is facing pressure from competitors in key segments who have boosted their incentives in an effort to find sales growth in a stalled market.

Rival Fiat Chrysler Automobiles (FCAU) boosted incentives on its Ram pickup line to sky-high levels in September. The results were predictable: A 29% year-over-year sales gain that appeared to come largely at GM's expense

(Pickup leader Ford (F 0.09%) wasn't unscathed, by the way. The Blue Oval responded by giving workers at its Kansas City Assembly Plant, one of two Ford plants that makes the F-150, a surprise week off to help reduce swelling inventories. And in its own earnings report on Thursday, it said that it had trimmed its fourth-quarter production plans.)

GM's U.S. retail sales were roughly flat year-over-year in the third quarter. They're flat at a high level, but growth from here may be hard to find. Has the market peaked? Or put another way, is this as good as it gets for GM's earnings?

GM is still optimistic about the U.S. market's prospects

If it is, GM executives think they'll be hanging around here for a while. 

CFO Chuck Stevens said on Tuesday that he expects profit margins in North America to stay at or above 10% through the next several quarters, in part because GM has a slew of important new products coming -- including revamped versions of many of its hot-selling and highly profitable crossover SUV models like the Chevrolet Equinox and Buick Encore.  

The company is in the early stages of replacing its entire crossover SUV portfolio with all-new models that incorporate major improvements. The new models should deliver better pricing -- or put another way, will probably sell well with minimal incentives. That should help preserve margins even as competitive pressures grow.

GM is also in the process of cutting costs, largely by taking better advantage of its vast global scale. The cuts are expected to lead to $5.5 billion in gains. And GM under CEO Mary Barra has shown consistently good discipline when it comes to incentives: GM is unlikely to give into the temptation to cut prices sharply to hit back at discounting rivals, even if it loses sales over the short term.

But with efforts under way to boost production of its hugely profitable pickups and big SUVs, and several all-new crossover SUV headed to market over the next couple of years, GM is obviously hoping that the party lasts a while longer. 

John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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