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GM’s Q3 Earnings Beat Estimates: Can It Sustain Growth?

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General Motors’ Q3 2018 earnings

General Motors (GM) reported solid third-quarter results on October 31. The company’s adjusted earnings stood at $1.87 per share for the quarter, up ~41.7% YoY. The company also beat Wall Street analysts’ consensus estimates of $1.25 per share by a huge margin. In the previous quarter, GM reported a ~4% YoY drop in its earnings and missed analysts’ consensus estimates.

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Key positive drivers

In the third quarter, General Motors’ global revenue surged 6.5% YoY to $35.8 billion, while its adjusted EBIT went up 23.1% YoY. With this, the company managed to improve its adjusted EBIT margin to 8.8% in the third quarter from 7.5% in the third quarter of 2017.

Higher US demand (XLY) for trucks and UVs (utility vehicles) continued to act as major positive factors that drove GM’s third-quarter revenue and profitability up. In addition, the company also raised the prices of its vehicles to protect its profit margins during the third quarter, which acted as a tailwind for its profits. GM continued to lose its global market share in the third quarter to 10.8% from 11.8% a year ago.

Is this growth sustainable?

General Motors’ third-quarter results were far better than Wall Street analysts’ estimates, which could be one of the reasons why its stock was trading 7.1% higher at 11:20 AM EST than its close on the previous day.

It’s important to note that GM’s third-quarter results were primarily driven by stronger US demand for trucks and UVs. However, a negative impact on truck and SUV demand due to the recent increase in gasoline prices and rising interest rates is still there. Also, GM’s third-quarter results clearly showcase its high dependence on the North America auto market, as its international results largely disappointed investors. In the third quarter, GM’s international segment’s adjusted EBIT fell to just $0.1 billion from $0.4 billion a year ago. Last but not least, GM’s strategy to increase vehicle pricing might result in lower demand for new vehicles going forward.

Despite these negative medium-term factors, GM’s solid third-quarter earnings beat might continue to drive optimism among investors in the short term. As of October 30, GM, Ford (F), Fiat Chrysler (FCAU), and Toyota (TM) were down 18.2%, 23.4%, 13.8%, and 8.6%, year-to-date, respectively.

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