Earlier this month, General Motors (GM 0.18%) warned that supply chain constraints would weigh on its second-quarter results. The ongoing global semiconductor shortage forced the U.S. auto giant to build about 95,000 vehicles without certain components last quarter, delaying shipments to dealers.
On Tuesday, the company reported Q2 results toward the lower end of its updated guidance range. Investors were displeased, sending GM stock down more than 3% and leaving it trading for roughly half the price it fetched in early January.
The General certainly does face short-term headwinds. But investors aren't giving the company enough credit for either its near-term resilience or its long-term upside potential. That makes GM stock a great buy today.
A modest earnings setback
General Motors' revenue increased 5% to nearly $36 billion in the second quarter. However, its adjusted operating profit plummeted 43% year over year to just over $2.3 billion. In its guidance update earlier this month, GM had estimated that it would report a Q2 adjusted operating profit between $2.3 billion and $2.6 billion.
That said, GM was facing a very tough year-over-year comparison last quarter. Additionally, about 75% of the vehicles that GM couldn't complete due to the chip shortage were high-margin full-size trucks and SUVs. That alone may have driven half of the earnings decline compared to Q2 2021. Furthermore, equity income from the company's joint ventures in China fell by over $400 million due to pandemic-related temporary production shutdowns.
Disruptions like these will likely crop up periodically over the next year or two. That said, the second quarter was unusually bad in this respect. On a full-year basis, GM still expects to achieve the guidance it set out earlier this year, calling for an adjusted operating profit between $13 billion and $15 billion, adjusted earnings per share between $6.50 and $7.50, and $7 billion to $9 billion of adjusted free cash flow.
Supply problems continue but demand stays strong
On General Motors' earnings call, CFO Paul Jacobson acknowledged that chip supply problems have continued into July. However, he still anticipates that GM will be able to ship nearly all of the incomplete vehicles in its inventory by year-end. The company's guidance range factors in the risk of some shipments slipping into 2023.
More importantly, demand for GM's vehicles remains red hot. Inventory continues to be the main constraint on sales. Dealers are averaging about 15 days of supply for GM's full-size pickups and less than 10 days for its full-size SUVs: a fraction of pre-pandemic levels.
Image source: General Motors.
The combination of supply constraints and strong demand isn't a bad problem to have. So far, GM sees no signs that customers are pulling back on auto spending due to inflation, rising interest rates, or recession fears. But even if demand were to decelerate, GM would have plenty of time to adjust production, dramatically reducing the risk that inventory becomes bloated and forces the company to ramp up discounts.
Great long-term growth prospects
GM has also made significant progress toward its long-term growth objectives in recent months. To give just a few examples:
- The first electric delivery vehicles from GM's BrightDrop subsidiary entered service last quarter.
- GM announced a deal to create a nationwide fast-charging network based at hundreds of Pilot and Flying J travel centers.
- The company's Cruise subsidiary became the first company to receive a permit to operate a ride-hailing service with autonomous vehicles in California.
- GM completed binding supply agreements covering all of the battery raw materials it needs to reach its goal of building 1 million electric vehicles annually in North America by the end of 2025.
As a result, General Motors executives remain confident in the company's target to double its revenue by 2030 while expanding its profit margin.
At the midpoint of GM's target range, operating income would reach $38 billion by 2030. For comparison, the company's market cap has fallen below $50 billion in recent months. If GM gets even halfway to its long-term earnings target by 2030, GM stock should deliver market-beating returns in the years ahead. And if GM actually achieves its 2030 revenue and earnings goals, GM could become one of the top-performing stocks of the 2020s.
