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GM's $5B Q4 China Setback: Is Its Long-Term Growth Story Intact?
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U.S. auto giant General Motors (GM - Free Report) is bracing for a $5 billion hit to its fourth-quarter adjusted pretax earnings due to struggling operations in China. This massive charge has raised concerns among investors about the automaker’s prospects in one of its most critical markets. However, while the immediate impact is undeniable, the broader picture of GM’s long-term growth story remains optimistic. Let’s delve into GM’s challenges in China, its key growth catalysts and why investors should remain on board.
General Motors’ Struggles in China
China has been an important market for GM, second only to its U.S. operations. The company operates in China through a 50-50 joint venture with SAIC Motor Corp., called Shanghai General Motors (SGM), producing and selling Chevrolet, Buick and Cadillac vehicles. However, GM has been losing its foothold in the region over the years.
In recent years, GM’s China operations have faced increasing pressure from the rapid rise of domestic competitors, a shifting regulatory landscape and surging demand for electric vehicles (EVs). The company’s deliveries in China dropped to 426,000 units in the third quarter of 2024, down from 542,000 units in the same quarter last year. Equity income from GM’s Chinese ventures has plummeted from a peak of over $2 billion in 2014-2015 to $347 million in losses across three consecutive quarters in 2024. GM’s market share in China has declined sharply, dropping from approximately 15% in 2015 to 8.6% in 2023. This marked the first time the automaker’s share fell below 9% in over two decades.
In response, GM is undergoing a comprehensive restructuring of its Chinese operations to reduce costs, optimize its vehicle portfolio, and better align with consumer demand. The automaker is writing down the value of its SGM joint venture by $2.6-$2.9 billion and incurring another $2.7 billion in restructuring charges, including plant closures and portfolio adjustments. While these costs would weigh on GM’s fourth-quarter profits, it expects its China business to show year-over-year improvement starting in 2025.
GM’s Long-Term Growth Engine Shines Bright
Despite the short-term headwinds in China, GM’s fundamentals and long-term growth prospects remain robust, underpinned by several key factors:
Dominance in the U.S. Market: GM continues to lead the U.S. automotive market with a strong portfolio of high-demand pickups, SUVs and luxury vehicles under brands like Chevrolet, Buick, GMC, and Cadillac. Its North America division, the company’s largest and most profitable segment, is a significant revenue driver.
Progress in Electrification: General Motors is forging ahead in the EV space, targeting profitability for its EV lineup on an EBIT basis by the end of 2024. It plans to produce approximately 200,000 EVs this year. GM surpassed Ford (F - Free Report) in total U.S. EV sales in the first nine months of 2024, trailing only Tesla. As General Motors scales EV production and reduces battery costs, its electrification strategy is poised to drive long-term growth.
Focus on Cost Discipline: GM is making substantial progress in its $2 billion cost-reduction program, targeting completion by the end of 2024. In 2023, the automaker achieved $1 billion in net cost reductions and is on track to slash another $1 billion this year. This disciplined cost management supports margin expansion and enhances financial flexibility.
Balance Sheet Strength: GM’s robust liquidity position provides a cushion against macroeconomic uncertainties. As of Sept. 30, 2024, the company had $40.2 billion in total automotive liquidity, including $23.7 billion in cash and cash equivalents. Its times-interest-earned ratio of 14, well above the industry average, underscores its financial resilience.
Investor-Friendly Moves: GM’s share buyback program reflects management’s confidence in the company’s future. In the last reported quarter, it repurchased $1 billion worth of shares and plans to retire an additional 25 million shares in fourth-quarter 2024. Such initiatives highlight the company’s commitment to enhancing shareholder value.
Price Performance & Valuation
GM’s stock has surged 48% so far in 2024, outperforming the broader market and its closest peer, Ford.
YTD Price Performance
Image Source: Zacks Investment Research
GM also remains attractively valued, with a forward price-to-earnings ratio of just 5.09, significantly below the industry. This discounted valuation, coupled with strong growth prospects, makes GM an appealing pick for value investors. GM has a VGM Score of A.
Image Source: Zacks Investment Research
Just a Temporary Blip, Long-Term Potential Unwavering
While GM’s $5 billion fourth-quarter charge related to its China operations is a near-term headwind, investors shouldn’t be much concerned. With a robust U.S. market presence, disciplined cost management, a strong financial position and promising advancements in EVs, GM remains well-positioned for long-term success. The company has also seen positive estimate revisions over the past 30 days, signaling optimism.
Image: Bigstock
GM's $5B Q4 China Setback: Is Its Long-Term Growth Story Intact?
U.S. auto giant General Motors (GM - Free Report) is bracing for a $5 billion hit to its fourth-quarter adjusted pretax earnings due to struggling operations in China. This massive charge has raised concerns among investors about the automaker’s prospects in one of its most critical markets. However, while the immediate impact is undeniable, the broader picture of GM’s long-term growth story remains optimistic. Let’s delve into GM’s challenges in China, its key growth catalysts and why investors should remain on board.
General Motors’ Struggles in China
China has been an important market for GM, second only to its U.S. operations. The company operates in China through a 50-50 joint venture with SAIC Motor Corp., called Shanghai General Motors (SGM), producing and selling Chevrolet, Buick and Cadillac vehicles. However, GM has been losing its foothold in the region over the years.
In recent years, GM’s China operations have faced increasing pressure from the rapid rise of domestic competitors, a shifting regulatory landscape and surging demand for electric vehicles (EVs). The company’s deliveries in China dropped to 426,000 units in the third quarter of 2024, down from 542,000 units in the same quarter last year. Equity income from GM’s Chinese ventures has plummeted from a peak of over $2 billion in 2014-2015 to $347 million in losses across three consecutive quarters in 2024. GM’s market share in China has declined sharply, dropping from approximately 15% in 2015 to 8.6% in 2023. This marked the first time the automaker’s share fell below 9% in over two decades.
In response, GM is undergoing a comprehensive restructuring of its Chinese operations to reduce costs, optimize its vehicle portfolio, and better align with consumer demand. The automaker is writing down the value of its SGM joint venture by $2.6-$2.9 billion and incurring another $2.7 billion in restructuring charges, including plant closures and portfolio adjustments. While these costs would weigh on GM’s fourth-quarter profits, it expects its China business to show year-over-year improvement starting in 2025.
GM’s Long-Term Growth Engine Shines Bright
Despite the short-term headwinds in China, GM’s fundamentals and long-term growth prospects remain robust, underpinned by several key factors:
Dominance in the U.S. Market: GM continues to lead the U.S. automotive market with a strong portfolio of high-demand pickups, SUVs and luxury vehicles under brands like Chevrolet, Buick, GMC, and Cadillac. Its North America division, the company’s largest and most profitable segment, is a significant revenue driver.
Progress in Electrification: General Motors is forging ahead in the EV space, targeting profitability for its EV lineup on an EBIT basis by the end of 2024. It plans to produce approximately 200,000 EVs this year. GM surpassed Ford (F - Free Report) in total U.S. EV sales in the first nine months of 2024, trailing only Tesla. As General Motors scales EV production and reduces battery costs, its electrification strategy is poised to drive long-term growth.
Focus on Cost Discipline: GM is making substantial progress in its $2 billion cost-reduction program, targeting completion by the end of 2024. In 2023, the automaker achieved $1 billion in net cost reductions and is on track to slash another $1 billion this year. This disciplined cost management supports margin expansion and enhances financial flexibility.
Balance Sheet Strength: GM’s robust liquidity position provides a cushion against macroeconomic uncertainties. As of Sept. 30, 2024, the company had $40.2 billion in total automotive liquidity, including $23.7 billion in cash and cash equivalents. Its times-interest-earned ratio of 14, well above the industry average, underscores its financial resilience.
Investor-Friendly Moves: GM’s share buyback program reflects management’s confidence in the company’s future. In the last reported quarter, it repurchased $1 billion worth of shares and plans to retire an additional 25 million shares in fourth-quarter 2024. Such initiatives highlight the company’s commitment to enhancing shareholder value.
Price Performance & Valuation
GM’s stock has surged 48% so far in 2024, outperforming the broader market and its closest peer, Ford.
YTD Price Performance
Image Source: Zacks Investment Research
GM also remains attractively valued, with a forward price-to-earnings ratio of just 5.09, significantly below the industry. This discounted valuation, coupled with strong growth prospects, makes GM an appealing pick for value investors. GM has a VGM Score of A.
Image Source: Zacks Investment Research
Just a Temporary Blip, Long-Term Potential Unwavering
While GM’s $5 billion fourth-quarter charge related to its China operations is a near-term headwind, investors shouldn’t be much concerned. With a robust U.S. market presence, disciplined cost management, a strong financial position and promising advancements in EVs, GM remains well-positioned for long-term success. The company has also seen positive estimate revisions over the past 30 days, signaling optimism.
Image Source: Zacks Investment Research
GM stock has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.