Investors will have to take headlines regarding General Motors' (GM +1.53%) second quarter with a grain of salt. It's true that the automaker's net profit fell more than 40%, as the sale of its European unit weighed on results. But it's also true that, stripping out those one-time items, GM's adjusted earnings per share increased 5.6% year over year to $1.89 per share, which easily topped analysts' estimates of $1.69 per share. Let's dig into that, as well as three other important takeaways from GM's second quarter.
One-time pain
It's worth clearing up why GM's net profit fell so much despite the company posting adjusted EPS improvements. GM agreed to sell its European operations in March for $2.2 billion, and it expects to take a $5.5 billion to $6 billion charge from that development. A big chunk of that will be a charge for $3.9 billion in previous losses that GM will no longer be able to carry forward to offset tax obligations on net income. Net income during the second quarter included a $770 million loss for its European operations as well as $654 million largely from its restructuring in India and the sale of its South Africa business. Expect more negative net income impact from the European operations sale, but that's why the adjusted numbers are used in analysts' estimates.
GM Renaissance Center headquarters in Detroit. Image source: General Motors.
Protecting the bottom line
Automakers operate in a cyclical industry, and there's nothing GM can do about that. Revenue will be softer during the downturns and consistently increasing on the upswings, but what GM can control is how it protects its bottom line -- and it did that in the second quarter.
Image source: General Motors' July 25, 2017, conference call.
GM emphasized discipline on incentive spending in North America during the second quarter compared to the first. From April through June, GM's monthly retail incentive as a percentage of average transaction prices checked in at 12.3%, 11.5%, and 12.1%, respectively -- three of its lowest months over the past 12. Furthermore, its ATPs topped $35,000 per vehicle, which was roughly $3,400 higher per vehicle than the industry average.
All in all, thanks in part to its improving incentive spending, cost-cutting, and salvaging higher transaction prices despite slowing sales, GM was able to protect its bottom line and posted a consolidated EBIT-adjusted margin of 10%, which is extremely strong, and a North American EBIT-adjusted margin of 12.2% -- also incredibly strong.
Inventory woes
Another factor that goes hand in hand with incentive spending is inventory levels: If inventories balloon out of control, it can lead to pricing weakness and can force automakers to increase incentives to move a larger portion of the vehicles off dealership lots. That's why there is some cause for concern about GM's inventory situation, although the company plans to tackle the issue during the second half of 2017.
GM ended June with 105 days' supply, higher than its original guidance of 90 days', and far ahead of the 70 days' it wants to be at by the end of 2017. Now, part of the buildup is due to upcoming plant shutdowns -- GM has at least 13 weeks of product launch-related downtime at various plants, so it built up inventories in preparation. GM CFO Chuck Stevens noted that to help alleviate this concern, GM expects to build 150,000 fewer vehicles during the second half of the year than in the first, which will help bring days' supply closer to its target.
A forgotten aspect
When people think of dividend stocks, or stocks that return a lot of value to shareholders through buybacks, few put GM high on that list. However, GM has really returned a lot of value to shareholders despite reinstating its dividend years after crosstown rival Ford did. In fact, during the second quarter alone, GM paid $0.6 billion in common stock dividends and repurchased $1.5 billion of common stock. For the full-year 2017, GM expects to return around $7 billion to shareholders through dividends and buybacks -- roughly $5 billion of repurchases and $2.2 billion in dividends. GM's dividend doesn't get enough love: It currently adds up to $1.52 per year for a yield of about 4.3%, and the company believes it to be sustainable through downturns.
If investors take anything away from the second quarter, it should be a glimmer of hope that GM can indeed protect its bottom line amid a cyclical downturn. So far, so good -- but one quarter doesn't make a trend.
