Last month, General Motors (GM 1.42%) posted strong results for the fourth quarter of 2020. The top U.S. automaker logged an adjusted operating margin of 9.9% and earnings per share of $1.93, easily beating the analyst consensus of $1.60.
Even as it posted excellent results to close out 2020, GM announced somewhat disappointing guidance for 2021. However, in recent years, the company has typically issued very conservative forecasts. Indeed, while GM is tamping down expectations for the coming year, it could beat its guidance by a wide margin.
Expecting flattish earnings
Management is calling for adjusted EPS between $4.50 and $5.25 in 2021. At the midpoint, that would be roughly equal to the company's 2020 adjusted EPS of $4.90. Prior to the earnings report -- when GM revealed its 2021 outlook -- analysts were calling for adjusted EPS of about $5.79 this year.
This projection of flattish EPS is somewhat surprising given the severe impact of the COVID-19 pandemic on the General's results last year. In the first half of 2020, adjusted EPS totaled just $0.13, mainly due to a two-month production shutdown.
GM expects two headwinds to weigh on its earnings this year. First, the global semiconductor shortage has forced it to idle some of its manufacturing plants for over a month. Management estimates that this will reduce the company's 2021 adjusted operating profit by $1.5 billion to $2 billion.
Second, commodity costs are surging. For example, steel prices have roughly doubled over the past six months. Higher commodity prices will boost GM's costs by "a couple of billion dollars," according to CFO Paul Jacobson.
Opportunities for outperformance
Notwithstanding the headwinds from the chip shortage and higher commodity costs, GM's 2021 guidance seems very beatable. With respect to the chip shortage, while General Motors has had to take significant downtime, it has maintained output of its main cash cows: full-size trucks and SUVs. That represents a huge improvement compared to 2020, when it had to halt all production for about two months because of the pandemic.
As for rising commodity costs, GM is working to offset that headwind with other savings. Moreover, between the strength of demand, tight inventory across the industry, and the fact that commodity cost inflation impacts all automakers, General Motors should be able to pass through a lot of its extra costs to customers.
Meanwhile, the continuation of the new-vehicle shortage and -- in all likelihood -- higher new-vehicle prices will keep used vehicle values elevated. Indeed, the Manheim used vehicle value index surged to a new record in February.
Strong used vehicle auction values helped the General's GM Financial subsidiary earn a record profit of $1.04 billion last quarter. For 2021, management expects a $2.5 billion operating profit at GM Financial: solid by historical standards, but well below the Q4 2020 run rate. With used vehicle market conditions likely to remain strong for most if not all of 2021, GM Financial could crush management's full-year target, helping offset some of the other headwinds General Motors faces.
Another case of conservative guidance?
The auto business is inherently volatile. The pandemic has supercharged that tendency over the past year. As a result, it is hard for auto executives to forecast earnings precisely at the outset of a year (or even a quarter). For that reason, GM has tended to issue conservative guidance in recent years, leading to lots of earnings beats.
Most notably, last July, management estimated that GM would earn an adjusted operating profit of $4 billion to $5 billion in the second half of the year. Instead, the company rang up a $5.3 billion adjusted operating profit in the third quarter alone. It followed that up with a $3.7 billion adjusted operating profit last quarter. That gave it a $9 billion adjusted operating profit in the back half of the year: double management's projection.
Of course, investors can't count on that degree of outperformance in 2021. However, GM shareholders shouldn't worry too much about the company's lower-than-expected earnings forecast. Despite facing new headwinds, the General is likely to post strong earnings growth this year.