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Why General Motors’ Margins are Expanding

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Importance of margins

With intensified competition in the auto industry (VCR), it’s important for investors to pay attention to automakers’ margins. In recent years, General Motors (GM) has taken some steps to expand its margins and profitability. In this article, we’ll take a look at General Motors’ margins and what it plans going forward in 2016.

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4Q15 margins

In 4Q15, General Motors reported an expansion in its gross profit margin to 16.7% from 14.1% in 4Q14. The company reported a record EBITDA (earnings before interest, taxes, depreciation, and amortization) of $3.96 billion with an expanded EBITDA margin of 10%. GM’s EBITDA margin in the consecutive quarter of the previous year stood at 8.2%. The company’s focus on retail sales and an intentional limiting of fleet sales to rental companies have also helped General Motors to expand its margins in 2015.

For 2015, GM was able to significantly expand its net profit margins to 6.4% versus 2.5% in 2014. GM noted that in 2015, it saved more than $2 billion in non-raw materials and logistics by strengthening its relationships with key suppliers. Also, GM’s margins benefited from the increased demand for pickup trucks and crossovers in North America in 2015. Notably, such vehicles typically yield higher profit margins than small cars.

General Motors’ margins are significantly higher than other automakers, including Ford (F) and Fiat Chrysler Automobiles (FCAU). Luxury carmaker Ferrari (RACE), which has the highest margins in the automobile industry, reported its 4Q15 earnings on February 3, 2016.

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2016 outlook

During its 4Q15 earnings call, General Motors reiterated that it expects to deliver adjusted earnings per share (or EPS) of $5.25–$5.75 in 2016. The company expects to sustain its strong margins in North America and China in 2016. GM doesn’t see US auto sales being at peak levels, and it believes that the industry fundamentals still support a continued strong US industry. As noted earlier in this series, Fiat Chrysler’s 4Q15 earnings presentation emphasized the possibility of the US auto market being at its peak level in 2015–2016.

The US is the largest and most profitable market for GM, which means that the growth in US auto demand is critical for the company’s future growth. Commenting on industry growth prospects, GM’s chief executive officer, Mary Barra, noted, “We understand that we are in a cyclical business and it’s very difficult for anyone to project the timing of a downturn.”

Going forward, it would be interesting to see how General Motors can continue to improve its presence in the largest auto market in the world: China. The uncertainty about US auto demand in the coming year may continue to haunt the company in 2016.

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