EUR 850.00 For Business Accounts Only

Morningstar | GM Closes 2018 With Strong Numbers From North America and GM Financial

General Motors management guided in January that fourth-quarter results would allow full-year 2018 adjusted diluted EPS to come above guidance of $5.80-$6.20. GM's fourth-quarter adjusted EPS of $1.43 easily beat consensus of $1.22, and full-year EPS of $6.54 handily beat guidance. GM also confirmed its 2019 EPS guidance of $6.50-$7.00. We see no reason to change our fair value estimate, but as always, we will update our model for the 10-K filing later this month.

Fourth-quarter total company adjusted EBIT fell 8.3% year over year to $2.8 billion. Growth in GM North America and GM Financial profits helped offset a $48 million loss in the GM International segment and a $194 million loss from GM's Cruise autonomous vehicle subsidiary. GMNA's adjusted EBIT margin of 10.2% grew 20 basis points year over year. The new-generation light-duty full-size pickups and incentives as a percentage of average transaction price about flat with the fourth quarter of 2017 enabled GM to offset commodity and material cost increases. Although the first quarter will be GM's weakest of 2019, we remain optimistic on GMNA's prospects for 10% EBIT margin, given a full year of the new light-duty trucks and full production of the new-generation heavy-duty trucks in the second half of 2019.

The GMI segment will have the full year of GM Korea's roughly $400 million in annualized cost savings, but China equity income, which was about $2 billion in 2018 and 2017, is expected to decline "moderately" in 2019. We assume moderately means at least 10% from 2018, but one positive in GM China is Cadillac. Cadillac was GM's only brand to increase global volume in 2018, and that happened because Cadillac China's volume rose 17% to 205,605 vehicles. This favorable mix shift helps GM offset some of the impact of its overall Chinese retail sales declining 9.8% to 3.6 million units. We expect Cadillac's momentum in China to continue in 2019 but likely not grow as much as 2018's 17%.

GM Financial is still expanding its loan base and will probably keep increasing assets through 2020, based on management comments on the call. Full-year pretax income of $1.9 billion rose 59% from 2017, and the captive paid a $400 million dividend back to GM in the fourth quarter. If earnings grow to about $2 billion by 2020, as management has discussed, then GMF is expected to dividend back 100% of aftertax income to GM in 2020. That payment alone (likely over $1.5 billion by our estimate) would provide at least two thirds coverage of GM's dividend payout, currently at about $2.3 billion. GM Financial continues to move more of its loan portfolio to above-subprime paper, and because of that, credit metrics keep improving. For the full year, charge-offs as a percentage of average retail finance receivables fell 20 basis points to 1.8% and fourth-quarter delinquencies over 30 days past due declined by 110 basis points from the fourth quarter of 2017 to 4.7%.