GM's Pandemic Boom Comes to an End

General Motors (GM) is an American multinational corporation headquartered in Detroit, Michigan. It designs, manufactures, markets, and distributes vehicles and vehicle parts, and offers financing, leasing, and other services to customers through a network of dealerships. GM employs over 180,000 people in over 400 facilities across six continents. In 2018, GM sold over 9 million vehicles globally.

The company's annual results show a business on the cusp of radical change and uncertainty. It is churning out profit by selling an old technology while investing more than ever in a new one. And it is cutting costs just in case.

On Tuesday, the largest U.S. auto maker by sales announced unexpectedly strong fourth-quarter revenues. This kept full-year profit at around the record pandemic-era level achieved in 2021. Improving chip supplies meant GM sold about 25% more vehicles than in 2021. Inflation in its costs was almost entirely offset by higher selling prices. The resulting bonanza compensated for deteriorating profit from the company’s financing arm. Falling used-vehicle prices and rising provisions for loan losses are headwinds in this area.

GM said that it expects 2022 to be the peak year for profits, but that the good times will continue into January. The company gave a better outlook for 2023 than analysts currently forecast, with earnings of between $6 and $7 per share. This is down from last year's record of $7.59, but higher than the analyst consensus of $5.57, according to FactSet. The stock rose 9% in early trading in anticipation of upgrades.

GM is expecting higher sales incentives, which could make it easier to find a decent deal on a new car. However, the company expects that the impact of these incentives on profit will be offset by improving costs and production, as supply-chain bottlenecks continue to ease. If we strip out a further deterioration in the lending business and a noncash pension adjustment, GM's operating profit this year would likely be in line with the previous year.

GM will need to generate a lot of cash flow to support its EV production plans. It has said it will need to spend between $11 and $13 billion a year on capital expenditures through 2025. That is compared to an average of about $7.6 billion a year that it has spent on capital expenditures in the five years through 2022. On Tuesday, GM announced that it was investing $650 million in Lithium Americas. This is to secure supplies of lithium from a project in Nevada. After the announcement, the stock of Lithium Americas went up by 14%.

GM is optimistic about 2023, but is also cutting costs. It expects to find savings of $2 billion over the next two years by reducing product complexity and corporate overheads. Chief Financial Officer Paul Jacobson said on a call with analysts that the company is being prudent about the macro environment.

Investors are cautious about GM's stock, which plunged last year. The stock is now trading at seven times forward earnings, in line with its postbankruptcy average. However, analysts expect the multiple to come down as they digest GM's bullish guidance. The cautious consensus could spell opportunity in the short term if the economy turns out to be as benign as the company expects.

The problem for longer-term investors is that there is a lot of uncertainty about 2024 and 2025, as GM ramps up production of EVs. The new technology won’t be very profitable at first, particularly following the recent price cuts by Tesla and Ford, and a lot could go wrong. GM had to recall its previous generation of EVs because they turned out to be a fire hazard.

The company has tried to present the technological changes in the car industry as opportunities for market-share gains and new profit streams. However, investors are focused on the risks inherent in such a fundamental change to the company's core business.