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Analysts Predict Expansion in GM’s EBITDA Margin in 2016

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GM’s EBITDA margin in 2016

In 2015, General Motors (GM) reported an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $12.9 billion with an EBITDA margin of 8.5%. Analysts are predicting that this margin will expand to 10.7% in 2016. In recent years, GM has been taking many steps to maintain its margins. We’ll look at these steps in this article.

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1Q16 estimates

According to analysts’ estimates, the company’ gross margin will be ~13.5% in 1Q16 against 14.1% in the corresponding quarter of the previous year. Also, analysts estimate that GM’s EBITDA margin in 1Q16 will expand to 9.4% from 7.0% in the first quarter of 2015.

Steps that GM took in recent years to protect its margins may also help the company to expand its margins in 2016.

Shutting down less profitable operations

In 2015, General Motors stopped manufacturing vehicles in Russia, eliminated the distribution of Opel in Russia, and minimized Chevrolet’s distribution in the country. GM took these steps mostly due to high competition in the region, which affected GM’s margins. Plus, there was a high capital investment required to localize its manufacturing. The company believed that its business model and low margins in Russia would not have been sustainable over the long term.

Cutting fleet sales

As noted earlier, cutting fleet sales has taken a toll on the company’s revenues and market share in the recent year. At the same time, cutting fleet sales and utilizing the vehicle manufacturing plant capacity to produce more profitable vehicles have helped GM’s margins. The more profitable vehicles for the company are pickup trucks and utility vehicles.

The company currently plans to continue with a reduction in fleet sales in 2016 as well, which may continue to negatively affect its revenues in the coming quarters. At the same time, this should also help GM achieve further expansion in its margins.

Note that automotive (VCR) fleet sales include the wholesale supply of vehicles to various taxi companies, car rental companies, and public departments. Typically, margins from fleet sales are lower than vehicle retail sales.

GM maintains higher margins than Ford (F) and Fiat Chrysler (FCAU). However, Toyota (TM) manages to maintain industry-leading margins.

Continue to the next article to find out about General Motors’ leverage position ahead of its 1Q16 earnings release.

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