The global semiconductor shortage is weighing heavily on auto industry earnings in 2021. For example, Ford Motor Company posted strong first-quarter earnings last week but warned that it would earn minimal profits for the rest of 2021 due to the shortage.
However, General Motors (GM 4.16%) has built an impressive track record of outperformance over the past several years. It didn't disappoint with its Q1 earnings report Wednesday. Earnings smashed analysts' estimates, and the company said it expects full-year earnings near the high end of its original guidance range, despite the impact of the chip shortage.
Strong results across the board
General Motors' adjusted operating profit totaled $4.4 billion last quarter -- up by more than $3 billion from the pandemic-impacted first quarter of 2020. Revenue was roughly flat year over year at $32.5 billion, largely due to production constraints related to the semiconductor shortage. Adjusted earnings per share reached $2.25, blowing past the analyst consensus of $1.04.
As usual, GM generated the bulk of its profit in North America. The company recorded a $3.1 billion adjusted operating profit on $26 billion of revenue in the region, good for a 12.1% operating margin. GM benefited from the launch of its high-margin full-size SUVs and strong demand in the U.S. (Domestic retail sales jumped 19% year over year despite severe supply constraints.)
GM also produced solid results in its other major market: China. Deliveries surged 69% year over year, coming in just 4% shy of Q1 2019 levels. Equity income from its joint ventures there totaled $308 million. Its other international markets (of which Brazil is the largest by far) broke even, which was a big improvement compared to their typical results of the past several years.
Lastly, GM's finance subsidiary continued to capitalize on a favorable combination of low interest rates, falling delinquency rates (helped by government stimulus programs), and record used vehicle prices. GM Financial earned $1.2 billion before taxes, up by $1 billion year over year and in line with the record quarterly profit it posted two quarters earlier.
Cruising through the semiconductor shortage
Like the rest of the auto industry, General Motors faces significant production constraints because of the ongoing chip shortage. It's in better shape than top rival Ford, though, as it has lower exposure to Renesas, a chipmaker that has lost production due to a fire at one of its plants in late March. GM has also implemented a variety of strategies across the company to mitigate the impact of the global chip shortage.
Meanwhile, management now expects GM Financial to continue delivering excellent results, primarily due to the strong pricing environment for used vehicles. The segment's full-year pretax profit is on track to surpass $3 billion.
This allowed GM to maintain the full-year forecast it set three months ago, which calls for adjusted operating profit of $10 billion to $11 billion and adjusted EPS of $4.50 to $5.25. In fact, GM says operating profit will likely come in near the high end of its guidance range.
Great things in store
The company's strong Q1 performance and solid full-year outlook should give investors confidence that GM will continue navigating the challenges of the auto industry with ease. The only subpar aspect of its performance last quarter was that it burned $1.9 billion of cash in its automotive operations. However, GM still expects to generate positive free cash flow for 2021 as a whole, despite an aggressive capital investment plan and a roughly $2 billion headwind from the semiconductor shortage.
As supply constraints ease, General Motors will be able to ramp up production again, setting the automaker up for excellent results in 2022. Looking even further into the future, GM has a slew of promising electric vehicles in the pipeline, highlighted by the relaunch of the HUMMER sub-brand. Its Cruise autonomous vehicle subsidiary also has massive long-term potential.
Despite these strengths, GM shares remain quite cheap at 12 times the midpoint of the company's 2021 EPS guidance range. That makes GM an extremely attractive stock for long-term investors.