Last week, top U.S. automaker General Motors (NYSE:GM) closed out a strong 2015 in record fashion. For the full year, adjusted earnings per share soared 65% to $5.02, driven primarily by strong sales and profitability in North America.
For several years, General Motors has touted a goal of producing a 10% operating margin in North America by 2016. Surprisingly, it achieved that target a year early, with a 10.3% adjusted operating margin in North America last year.
GM's original plan called for further margin expansion in North America in 2016, driven largely by a slew of new and refreshed models. That margin driver still remains intact -- which means that 2016 could be an even more profitable year for the General.
Great sales with old models
The single most remarkable aspect of General Motors' strong performance in North America last year was that it posted market share gains and strong margin expansion with the oldest car and crossover portfolio of any automaker.
GM had a few new and recently refreshed models in the market (most notably the Buick Encore and Chevy Trax small crossovers). However, most of the car and crossover models that GM was selling in 2015 had not seen major changes for several years.
This meant that GM had to lean heavily on its lineup of pickup trucks and full-size SUVs to drive margin expansion last year. Fortunately, the company had relatively new products in these highly profitable segments that were up to the task.
Lots of new vehicles coming
GM plans to dramatically revamp its car and crossover lineup in 2016 and 2017. First, GM has updated its high-volume midsize and compact car models: the Chevy Malibu and Chevy Cruze.
The company has targeted a $1,500 variable profit per vehicle improvement from these new models. GM routinely sells more than 400,000 compact and midsize cars annually in the U.S. alone, so this increase in profitability could really add up. The new Malibu is already on sale and had a very good January. The new Cruze will follow within the next few months.
Second, GM will significantly improve the Cadillac product lineup this year. A new top-of-the-line luxury sedan, the CT6, has already entered production. It is scheduled to start shipping to dealers next month. Cadillac has also unveiled a new crossover, the XT5, which will go into production this spring. The XT5 will replace the ancient Cadillac SRX, which hasn't been refreshed since the 2013 model year.
These Cadillacs clearly don't have the same sales potential as the high-volume Chevy models. However, if the new products live up to the hype, the per-vehicle profit improvement could be much larger, due to their high selling prices.
Finally, GM isn't ignoring the truck market. While it launched all-new versions of the popular Chevy Silverado and GMC Sierra pickups less than three years ago, GM updated both trucks for the 2016 model year. This should keep its biggest profit driver intact in 2016.
2016 is just the first year of a two-year push by General Motors to dramatically improve its product lineup in North America. This year, it is primarily focusing on its cars. In 2017, GM will turn its attention to the crossover market.
Today, the Chevy Equinox has to cover both the compact and midsize crossover markets. Next year, GM is expected to rectify that problem by unveiling a new, smaller Equinox, a new Chevy Traverse in the large crossover segment, and an all-new model that would fill the gap between them. It will also refresh the Chevy Trax for the 2017 model year, even though it only went on sale in North America in late 2014.
New models have been a key part of General Motors' profit improvement plans all along. It managed to earn a record profit in North America last year even without the benefit of this earnings driver. As GM's new models show up in 2016 and 2017, the company can continue to build on its stellar profitability at home.