Why GM's Stock Tanked After Earnings

At first glance, General Motors' (GM -0.04%) second-quarter results seemed pretty good. While the global semiconductor shortage kept GM from shipping as many vehicles as it would have wanted, its profitability on the vehicles it did ship was excellent. But GM's stock fell sharply on the news, closing down almost 9%.

What happened? In this Motley Fool Live video, recorded on Aug. 5, Industry Focus host Nick Sciple and Motley Fool senior auto specialist John Rosevear dug into the numbers (and into Wall Street's expectations) to explain why auto investors didn't love GM's report, despite the good profit.

A transcript is below the video.

Nick Sciple: OK, John. Let's move on to GM now. GM shares fell sharply after earning close to 9 percent by the end of the day. What did Wall Street see in the earnings that led to that move?

John Rosevear: It's an interesting question because I didn't [laughs] know it was dropping. It's "Oh my God, they missed." If you look at the underlying numbers, it was a good quarter. Revenue fell short, that was a clear miss no matter which set of polls you looked at, whether it was Bloomberg or Thomson Reuters, or whatever, some of the other ones we use. Revenue fell short, but that was they shipped fewer vehicles in the second quarter than we expected. They've got thousands and thousands of vehicles that are built except for a couple of computer chips sitting on lots, all through the Midwest. We're seeing images of those all the time. I saw one lot today where they're putting 1,000 GM pickups a day into the lot out of one of their full-size pickup factories. It's just huge. Rows and rows of trucks waiting for these chips to come through. They can't record the revenue until they're actually shipped to dealers, until they're done. There is that, and you say, OK, they missed on revenue, but that's reasonable. But their profitability was terrific. Bloomberg expected $2.23 a share. I think Reuters' estimate was considerably lower. It was an odd thing because there was some divergence there. I don't remember exactly where GM came in, but it was certainly better than I thought we would see.

Nick Sciple: $1.97 is what I have here.

John Rosevear: Yeah, $1.97. I think some people were looking around a buck and a half, and yeah, the profitability is really good here. Their margins were extremely strong. What we say with GM is EBIT adjusted. It's operating profit minus one-time items, which weren't significant this quarter. The 12 percent EBIT adjusted margin, that's big news in the auto business. That's a really strong margin. Mary Barra is keeping this thing on track. They're making good money. With GM, a lot of the story is pricing. They have been able to ship somewhat higher percentage of their vehicles to dealers than perhaps Ford has, especially in North America. They are making some conquest sales, especially in trucks and SUVs in places where Ford dealers might be tapped out because they [GM] can get some Silverados to dealers or whatever. They had a very good result in North America, a good profit. They, too, with their financial services arm, also saw some of the same dynamic we talked about at Ford where the used vehicles coming off lease are getting better returns at auction than they expected. That funds up their profit. GM Financial pre-tax profit I think was $1.6 billion, whereas they usually run around $300, $400 million a quarter. That's very stout and so forth. China is performing better for them. Not back to where it was a couple of years ago, but better than we have seen in the last few quarters. Again, in China, they have also got factories that are limited by chip shortages. We've even seen this with some of the Chinese automakers, one electric vehicle maker, Nio, which I know a lot of our viewers follow, has had some of the same chip-related disruption. But Mary Barra has got it on course. They were cautious with guidance. This is also true at a number of other automakers simply because we aren't sure yet that the chip situation is going to get better [laughs] by the end of the year. A lot more capacity is coming on line, but whether those chips land in September or in next January is still somewhat a fluid situation, and I think we're going to see more detail, and more clarity on expectations maybe over the next 60 days or so.

Nick Sciple: Yeah, the chip shortage thing is something affecting all these automakers to one extent or another, and it's something that's out of their control. Until the supply chain gets back operating and we can account for those issues, there's really not much they can do besides, as you mentioned, start parking the cars in the lots and waiting for them to have those modules to put in the vehicle.

John Rosevear: I do think just to be clear, that's why the guidance was soft because they would rather under-promise and over-deliver. They'd rather have the upside surprise rather than have to say: "Whoops, chips didn't come in in time. We got caught out. We made 100,000 fewer trucks in the quarter than we expected." Something like that. I think Wall Street was expecting more optimism around chip supplies, really is the story there. It's not just a GM story, of course.