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Better Product Mix, Lower Fleet Sales Boost GM’s US Earnings

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Better product mix

Previously, we saw that General Motors’ (GM) earnings improved significantly in 2Q15. In this part, we’ll look at the 2Q15 financial performance of GM’s North American operations. GM is the market leader in North America followed by Ford (F) and Toyota Motor Company.

The so-called cocktail of low interest rates and low gasoline prices has led to higher SUV (sports utility vehicles) sales in recent months. Larger vehicles generally have a higher profit margin per vehicle.

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General Motors gained market share in larger vehicles

GM’s overall market share in North America came down in 2Q15 on a year-over-year basis. You can see this in the above graph. However, it managed to increase its market share with a better product mix of trucks and crossovers.

A higher share of trucks and crossovers boosted GM’s 2Q15 profit margins. GM’s North American operations posted a record adjusted EBIT (earnings before interest and taxes) of $2.8 billion in 2Q15 at a margin of 10.5%.

Lower fleet sales

GM’s fleet sales as a percentage of total sales fell to 24.4% in 2Q15, compared to 27.6% in the previous year. Fleet sales, or wholesale sales, are made at a discount to the vehicle’s normally quoted price. These sales help companies add to their revenues without contributing proportionately to profits.

Toyota Motor Company has generally preferred retail sales over fleet sales. This preference could be one reason behind the company’s higher profit margins. After running after market shares and higher shipments, US (SPY) (VTI) automakers like Ford and General Motors have realized that investors don’t exactly value higher market shares. If that were the case, Tesla (TSLA) wouldn’t have commanded such premium valuations. Although Tesla isn’t currently churning out profits, the company offers a unique business model that investors seem to like.

Meanwhile, GM’s China operations delivered better-than-expected results. We’ll look at this in detail in the next part of this series.

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