GM’s Strong Q3 Boosts Stock, But Challenges Loom

General Motors (NYSE:GM) posted a better-than-expected set of Q3 2024 results, sending the stock up by close to 10% on Tuesday, taking its total gains for the year to about 50%. Revenue rose 10.5% year-over-year to $48.8 billion, while net income attributable to stockholders stood at $3.1 billion, led by strong performance in North America. GM also increased its 2024 guidance, projecting between $14 billion and $15 billion in adjusted operating profits, up from its previous estimate of $13 billion to $15 billion. GM raised its adjusted automotive free cash flow forecast to $12.5 billion to $13.5 billion, from $9.5 billion to $11.5 billion.

Growth in the quarter was driven by several factors. First, GM gained U.S. market share, fueled by strong demand for its trucks and SUVs. Retail sales rose nearly 3%, driven by strong performance from the GMC, Cadillac, and Buick brands although this was partly offset by weakness at Chevrolet, which saw lower sales of cars and pickup trucks such as the Silverado. On the electric vehicle front, GM posted record deliveries of 32,095 units, representing a nearly 60% year-over-year increase. Moreover, the company benefited from above-average pricing and lower incentives, supported by resilient consumer demand and a strong employment environment in the U.S.

In the last quarter, GM’s average vehicle price exceeded $49,000, as it raised prices and reduced discounts and incentives. GM’s new deal with the United Auto Workers, finalized last November, has also been having a softer-than-anticipated impact on earnings thus far. While the company did face higher costs, including a $700 million increase in warranty expenses and a $200 million rise in manufacturing costs, its adjusted operating margins still grew slightly to 8.4%, up 30 basis points year-over-year.

Looking ahead, recent changes to U.S. monetary policy could also provide a tailwind for GM and auto stocks at large. Last month, the Federal Reserve implemented its first rate cut in nearly four years, reducing the benchmark federal funds rate by 50 basis points to a range of 4.75% to 5%. With room for further rate reductions, lower borrowing costs may stimulate demand for big-ticket purchases such as vehicles, benefiting automotive players such as GM. Check out our analysis of other ways to profit from the Fed’s next move?  

The increase in GM stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 41% in 2021, -42% in 2022, and 8% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. . And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could GM face a similar situation as it did in 2022 and 2023 and underperform the S&P over the next 12 months – or will it see a strong jump?

We have a $48 price estimate for GM, which is 10% below the current market price. GM is facing some challenges in China, the world’s largest automotive market, where it lost about $137 million over the most recent quarter. While the company intends to restructure its operations here, it could prove a headwind in the near term. We also have concerns about GM’s transition to electric vehicles (EVs). While its recent success has been fueled by gasoline-powered cars, the current slowdown in the EV market appears to be temporary.

In the long term, EVs are expected to dominate, and GM could struggle to keep up with the competition. Tesla already leads the U.S. EV market, and Chinese manufacturers are gaining ground with stylish, high-tech vehicles at budget prices. This puts GM at a disadvantage, as its EVs currently account for only about 4% of its U.S. sales. See our analysis on General Motors Valuation: Expensive Or Cheap for more details on what’s driving our price estimate for GM. For more information on GM’s business model and revenue trends, check out our dashboard on General Motors Revenue: How GM Makes Money.

[1] Returns as of 10/24/2024
[2] Cumulative total returns since the end of 2016