After rivals like Ford Motor and Fiat Chrysler reported strong third-quarter results late last month, it was clear that General Motors (NYSE:GM) was poised to report impressive results for the quarter. However, investors couldn't have predicted just how strong the General's Q3 results would be. GM's blowout quarter is yet another sign that the top U.S. automaker has a bright future.

Earnings and cash flow are way above forecasts

Back in late July, GM reported an adjusted operating loss of $536 million for the second quarter, as production stoppages caused by the COVID-19 pandemic reduced revenue. These stoppages also created severe working capital headwinds, causing General Motors to burn $9 billion of cash during the period.

Management and industry analysts anticipated a solid recovery in the third quarter. However, demand returned faster than expected, boosting sales and limiting the need for incentives. That paved the way for record-setting performance in many respects.

A white Chevy Silverado on a dirt road, with a green field in the background.

Image source: General Motors.

Revenue was flat year over year at $35.5 billion. Yet GM's adjusted operating margin surged by 6.5 percentage points, reaching a record level of 14.9% and driving a 78% year-over-year increase in adjusted operating income to $5.3 billion. The biggest gains came in North America, where GM generated $4.4 billion of adjusted operating income, up from $3 billion a year earlier. The GM Financial segment also posted strong earnings growth, with adjusted pre-tax income reaching $1.2 billion, compared to $711 million a year ago. Lower-than-expected credit losses and high used vehicle prices both contributed to that impressive result.

Adjusted earnings per share jumped 65% year over year to $2.83, which was more than double the average analyst estimate of $1.38. Moreover, the company generated $9.1 billion of adjusted automotive free cash flow, fully offsetting its Q2 cash burn.

The outlook is also impressive

General Motors expects its momentum to continue into the fourth quarter. Demand trends have been stronger than previously expected, particularly in the U.S. and particularly for high-margin full-size trucks.

For the second half of 2020, management now estimates that adjusted operating profit will total between $8.5 billion and $9 billion. That would imply a $3.2 billion to $3.7 billion adjusted operating profit this quarter. Meanwhile, management projected second-half adjusted automotive free cash flow between $11.5 billion and $12.5 billion, implying $2.4 billion to $3.4 billion of free cash flow in the upcoming quarter.

These guidance ranges imply somewhat better earnings but lower free cash flow than what GM has typically reported in the fourth quarter in recent years. General Motors has a track record of putting out conservative forecasts, though, so it's possible that its actual Q4 results will be even better.

Management also provided some initial expectations for 2021, suggesting that earnings should be roughly in line with GM's original 2020 guidance, which called for adjusted EPS between $5.75 and $6.25. That would be far above the recent analyst consensus of $4.70 -- and again, GM's forecasts tend to be conservative.

GM is investing for the future

During GM's earnings call, management warned investors not to read too much into the automotive giant's incredible third-quarter performance and strong fourth-quarter outlook. The surge in used vehicle prices this year is providing unusual tailwinds for GM Financial. The strong pricing environment is equally unsustainable. Finally, many of the General's austerity measures need to be reversed to enable future growth.

However, General Motors' aggressive investment plans are also why management is urging investors to be cautious about near-term earnings and cash-flow estimates. Most notably, the company wants to bring new electric vehicles to market faster than it had previously envisioned. For example, GM has announced multibillion-dollar investments this year to transition a pair of manufacturing plants to EV production, and it sounds like that could be just the beginning.

Fortunately, the continuing strength of GM's core business will allow the automaker to invest heavily in long-term growth initiatives while still generating plenty of free cash flow. That means GM can adapt to the changing auto market, set itself up for future growth, and also continue rewarding shareholders in the near term. That combination is extremely attractive for investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.