In the first half of 2019, domestic pickup truck sales cratered at General Motors (GM 2.40%), as GM lost share to Ford Motor (F 3.12%) and Fiat Chrysler (FCAU). Despite the sales decline in this extremely lucrative market segment, GM's profitability has held up quite well over the past two quarters.
Management says that the General's full-size truck lineup should start to regain market share in the second half of 2019. The recent launch of its next-generation heavy-duty trucks, better availability of the most affordable Chevy Silverado variants, and higher production capacity will all contribute to this expected sales turnaround. As a result, GM is on track to post solid growth in earnings per share during the second half of 2019 and into 2020.
Pickup sales fall, but profit stays roughly stable
In the first quarter of 2019, domestic deliveries of GM's full-size pickups -- the Chevy Silverado and GMC Sierra -- fell 12.5% year over year. The downward trajectory continued last quarter, as domestic deliveries of GM's full-size trucks fell 7.3% year over year.
By contrast, longtime market leader Ford has held sales of its F-Series pickups roughly steady in the U.S. this year, while also taking a big bite out of the midsize truck market with the recently reintroduced Ford Ranger. Most notably, Fiat Chrysler's decision to sell deeply discounted older models alongside its next-generation Ram trucks has caused Ram sales to surge during 2019, including a 38% year-over-year gain last quarter.
Full-size trucks account for most of the profit produced by Ford, GM, and -- to a lesser extent -- Fiat Chrysler. Thus, it would have been natural to expect that General Motors' falling pickup sales in the first half of 2019 would have severely damaged its profitability.
That wasn't the case, though. For the first six months of 2019, GM's adjusted operating profit in North America stayed steady at $4.9 billion. Cost cuts and a favorable mix shift from cars to crossovers offset the headwind from fewer truck sales. Globally, adjusted operating profit slipped to $5.3 billion from $5.8 billion a year earlier, mainly due to weakness in China.
Management offers hope for a sales turnaround
In recent months, GM's management has blamed the decline in full-size truck deliveries on a shortage of the most-affordable variants. (General Motors deliberately started the rollout of its new pickup models with the more-lucrative crew-cab option.) Additionally, GM took downtime at its heavy-duty truck plant last quarter to boost capacity.
Indeed, General Motors posted double-digit sales growth for its crew-cab pickups in each of the first two quarters of 2019. This seems to confirm that underlying demand for the company's trucks remains quite strong. GM also stated that its retail market share improved by 3 percentage points in Q2, relative to Q1, suggesting that the General started to regain share from Ford and Fiat Chrysler as supply constraints eased.
Looking to the second half of 2019, GM says that it now has adequate supply of regular-cab and double-cab models for its light-duty pickups. Meanwhile, the first of its all-new heavy-duty models are now reaching dealer lots, although GM is again focusing on the most lucrative crew-cab models to start. Additionally, GM has increased its production capacity by 20,000 units annually for light-duty trucks and 40,000 units annually for heavy-duty trucks.
As a result, sales of light-duty trucks -- the higher-volume part of the market -- should return to growth in the second half of 2019. Supply constraints may continue to weigh on sales of heavy-duty trucks this quarter, but sales growth should resume before year-end in that segment, too.
GM's earnings could take off
With GM expecting a rebound in pickup sales and a stronger mix of heavy-duty trucks in the second half of 2019, it's no surprise that management is bullish about the company's earnings growth prospects.
For the first half of 2019, adjusted EPS declined to $3.04 from $3.24 a year earlier. However, GM expects its full-year adjusted EPS to come in between $6.50 and $7, compared to $6.54 a year earlier. This implies that EPS will increase by at least 5% (and as much as 20%) year over year in the second half of 2019.
2020 could be an even better year. GM's full-size truck models will still be quite fresh next year, and the company should have good availability of all variants throughout 2020. Additional cost cuts, the growth of Cadillac's crossover portfolio, and all-new full-size SUVs should also bolster General Motors' earnings next year. That should help offset potential pressure from slower economic growth in the U.S. or abroad.
For now, analysts and investors still seem skeptical of GM's ability to sustain its recent success. As a result, GM stock trades for less than six times its projected 2019 earnings. That just creates more upside for patient shareholders if the company can follow through on its plans.