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General Motors Company (NYSE:GM) reported an earnings beat Tuesday, yet the stock tanked after GM issued guidance for the remainder of 2021 that came in below consensus estimates.
The automaker expects EBIT for the remainder of the year to come in at $3.5-5.5 billion, far lower than consensus estimates of $6.6 billion.
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Morgan Stanley’s Takeaways On GM Earnings
Analyst Adam Jonas drew insights regarding the broader automotive landscape from GM’s guidance.
Many investors in the automotive space are looking for a “peak ICE earnings” to move stocks higher, yet the GM guidance suggests they should not hold their breath, the analyst said.
GM's low FY21 guidance reminds investors “there’s always something to mess up the momentum quality” in the automotive industry, he said.
Potential points of stress through the remainder of the year may include the ongoing chip shortage, input cost inflation and rising R&D costs, Jonas said.
Additionally, it is extremely unlikely that GM and other legacy OEMs will be able to seamlessly transition from an ICE to EV business without major margin disruptions, said the Morgan Stanley analyst.
The cyclical nature of the automotive means earnings will not be key drivers of share price movement, rather strategic decisions, and sustainability of the underlying business, he said.
Simply put “cycle drives the earnings, strategy drives the multiple,” said Jonas.
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Jonas maintains an Overweight rating on GM with an $80 price target.
Credit Suisse’s Takeaways On GM Earnings
Analyst Dan Levy maintained an Outperform rating on GM and cut the price target from $77 to $75.
Over the last 12 months, the automotive manufacturer delivered record-setting EBIT of $17.5 billion — the previous high was $13 billion in 2017 — indicating GM is in a “peak earnings scenario,” said the analyst.
Despite this, the recent pullback in GM’s share price and the company’s more-than-likely conservative guidance presents a solid buying opportunity, he said.
Guidance for the remainder of 2021 is conservative around volume and price, Levy said.
While concerns such as higher commodity costs and non-repeating investment gains made sense, GM guided volume below the results of the first half of 2021, the analyst said.
Many in the automotive industry have said the chip supply constraints — a headwind to volume — are easing, which would indicate that volume should pick up in the remainder of 2021, he said.
Even if the volume projections are accurate, it is likely that pricing will see upside to compensate, said Levy.
Taking a look at 2022 guidance, a “significant inventory build” is expected for GM, indicating upside to the estimates provided by management, the analyst said.
GM Price Action
General Motors Company gained 1.12% Friday, closing at $55.05.
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