General Motors: Getting Recall Fixed a Great Time to Buy a New Car

An amazing story from Bloomberg yesterday helps explain, in part, why General Motors’ (GM) sales keep rising, despite all the recalls:

As owners of recalled General Motors Co. cars roll into Duane Paddock's Chevrolet dealership for repairs, the unexpected happens. While their old cars are in the shop, they kick tires on new models in the showroom. Some even buy one…

In an unusual twist, the influx of owners of older models is stimulating business at GM dealerships, according to car-buying website Edmunds.com. That fueled a surprise 1 percent rise in GM sales in June, trouncing analysts' estimates for a 6.3 percent decline. The surge was driven by growth in lease deals and new models like GM's redesigned big sport-utility vehicles. Cadillac Escalade sales jumped 84 percent, Chevy Suburbans rose 73 percent and GMC Yukon deliveries doubled.

Citigroup’s Itay Michaeli and team think General Motors is well on its way to 10% margins thanks, in part, to sales of Cadillacs and SUVs:

Most investor conversations about GM delve into the GM vs. Ford (F) North America margin comparison. The common perception is that GM is a "catch-up" story whose ~8% margins might migrate towards Ford's healthy 9-10% level. Indeed, GM is striving to catch up with Ford in major areas like global platforms, mix and small/mid car margins. But the story doesn't end there—if GM achieves a 10% margin, it won't just "catch-up" but rather establish NA margin leadership. How? Mainly because EBIT overlooks GM's D&A expense accounting for ~2pts of the GM/F margin gap (partly due to accounting)—so on EBITDA/EBITDAP GMNA is already as profitable as Ford. If GMNA achieves a 10% EBIT margin, Ford's pre-tax margin would need to hit ~12% (above 8-10% mid-decade guide) to match GM on EBITDA(P). What makes GM's relative margins healthier despite the operating disadvantages described earlier? In our view, this has to do with GM having three uniquely valuable assets—(1) A larger luxury business (Cadillac ~2x Lincoln); (2) Strong presence in high-margin large SUVs; (3) OnStar (>$1bln of est. revenue). Combined,
we estimate these three comprise ~20% of GMNA's revenue base.  Stripping these out suggests the remaining ~80% of GMNA is far less profitable than Ford, but that also underscores the "self-help" opportunity behind GM's plan and its conviction over the 10% goal.

Shares of General Motors Have risen 0.3% to $37.70, while Ford Motor is little changed at $17.21.