Please ensure Javascript is enabled for purposes of website accessibility

What Investors Need to Know From GM's "Office Hours" Presentation

By Daniel Miller - Apr 10, 2017 at 1:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

During GM's "Office Hours," CFO Chuck Stevens had the opportunity to offer insight on multiple hot topics -- here are some highlights.

General Motors' (GM -5.96%) "Office Hours" was a welcomed addition to its list of conference calls as it gives GM CFO, Chuck Stevens, the opportunity to deliver more focused insight into many of the hot topics facing the automaker. Those topics include a review of the recent Opel/Vauxhall transaction as well as global trends, inventory levels, and residual pricing headwinds. Let's jump in and cover three key takeaways from the wealth of information from Stevens.

Apples to oranges

In one of GM's more bold decisions in recent years, management decided to cut its losses in Europe and sell its Opel/Vauxhall brands and operations. Since Detroit's largest automaker had failed to turn a profit in Europe this century, it was a surprising move, but one well received. The move improves the company's EBIT-adjusted profitability, enables GM to return $2 billion more cash to shareholders through buybacks, and reduces its overall breakeven point.

The sale also opened up the possibility of GM exiting other difficult markets, such as South America, but it's not an apples-to-apples comparison, and Stevens talked down the possibility of exiting that region. Part of the reason is simply that GMSA has more recently posted profits. Looking back as far as 2010, GMSA posted EBIT-adjusted profits of $818 million compared to a near $2 billion loss in GME. As you can see in the graph below, while GMSA has had a rough couple of years, the automaker believes it to be more of a blip on the radar long term.

Graph showing consistently more profitability from GMSA than GME, from 2010-2015.

Information source: GM SEC filings. Image by author.

Inventory buildup

Following General Motors' March sales data, investors were quick to point out the automaker's inflated inventory levels. GM ended March with 98 days' supply of vehicles in inventory, which is much higher than the preferred 60-70 days' supply range for cars and SUVs, with trucks typically having slightly more supply.

The good news is that GM expects its inventories to fall to about 90 days' supply during the second quarter as production of passenger cars decline and sales from a typically strong spring season occur. However, as Stevens pointed out in GM's "Office Hours" presentation, the driving force behind its bloated inventories is simply buildup prior to launches of multiple crossover vehicles and the required plant changeovers.

For context, from 2011 through 2016, GM's percentage of global sales from new or refreshed vehicles (less than 18 months in production) generated about 26% of sales. That's estimated to rise quickly to about 38% between 2017 and the end of 2020. Ultimately, GM's inventory appears higher than normal, and investors would be wise to watch incentive spending and retail sales going forward -- but it appears less dire when considering the boost in upcoming vehicle launches.

Detroit skyline at night.

Detroit skyline. Image source: Getty Images.

Residual value pain

General Motors Financial (GMF) has been one pillar of the automaker's bull thesis over the past few years. It's been almost an instant injection of bottom-line profits, but the risk for investors is when residual values of used cars drop faster than estimated on lease contracts. When that happens, and residual values have dropped more than expected recently, it can quickly put a dent in an automaker's bottom line.

Fortunately, despite the drop in residual values, GMF looks positioned to weather the storm -- at least for now. GMF's used car prices are expected to decline roughly 7% in 2017, with a weaker first quarter than expected thanks to a larger-than-anticipated drop in its crossover utility vehicle segment. For context, about 45% of GMF's North America lease portfolio are CUVs, while cars and trucks/SUVs account for 25% and 30%, respectively.

Stevens noted that some used car demand could have been delayed because of slower tax returns, and that March has been an improvement from the first two months of 2017. Despite the residual value headwinds, GMF is still expected to post a better pre-tax profit than it did in 2016, excluding impact from the sale of its European operations, but expect this topic to remain a concern going forward.

With some of GM's inventory and residual value issues explained, now all eyes will turn to the automaker's Friday, April 28, 2017 first-quarter conference call, which is likely shaping up to be a pretty solid start to the year. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

General Motors Company Stock Quote
General Motors Company
$35.83 (-5.96%) $-2.27

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/19/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.