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Analysis of GM Sales Revenue and Profitability

GM Sierra HD Denali. Source: GMC Webpage

Most investors are keen to find out the growth of a company through revenue growth. The reason is that revenue directly correlates with the demand of the company products and subsequently, the ability of the company to reward shareholders in the forms of dividends or shares buyback if there is any, and subsequently capital gain in the stock price.

In this article, we will explore the total net sales and revenue of General Motors (NYSE:GM) and find out the company’s revenue growth over multiple quarters. We will also investigate some of the quarters with a significant revenue decline and dig in the reason for the drop by studying the company’s financials.

Other than total revenue, we will also look at the revenue by business segments and by regions to find out how each revenue segment or region performs in terms of sales growth and profitability.

Before summing up, we will also find out GM’s profitability and explore how much of that revenues or sales have actually translated to operating income. In this aspect, the operating margin will be used to gauge the profitability of GM’s core operations, which in this case will be the automotive and financial services.

Before we start, let’s take a look at General Motors’ income statement to get a glimpse of what the company’s total revenue is comprised of.

GM Q3 2019 income statement

GM Q3 2019 income statement

As shown in the above snapshot, General Motors’ net sales and revenue comes mainly from the following two major business segments:

  • 1. Automotive
  • 2. GM Financial

In general, GM’s core businesses consist of both automotive and GM Financial. These are the major core operations that generate the bulk of sales for the company.

Surprisingly, other than manufacturing and selling cars, GM also involves in financial services which are highly profitable (you will see below) that bring in a big chunk of profitability to the company.

Automotive

GM’s automotive business are divided into GM North America (GMNA), GM International (GMI) and GM Corporate. According to General Motors, GM International primarily meets the demands of customers outside North American with vehicles developed, manufactured and/or marketed under the Buick, Cadillac, Chevrolet, GMC and Holden brands.

The international operations also include GM’s presence in China with vehicles developed and marketed under the Baojun, Buick, Cadillac, Chevrolet and Wuling brands.

GM Corporate also falls under the automotive segment but its revenue contribution has been negligible. As a result, I have excluded the revenue from GM Corporate in some of the charts below.

The following snapshot shows GM revenue disaggregations which is extracted from the company financial report.

GM revenue disaggregation

GM revenue disaggregation

As you can see from the above snapshot, GM automotive revenue is derived primarily from sales of new vehicles, parts and accessories. Besides, sales of used vehicles and services are also part of GM’s automotive revenue.

Revenue from China

GM does not derive any revenue from the automotive business in China. Instead, GM recognizes the revenue from China through Equity Income in the income statements. The reason is that GM does not own more than 50% of equity in all the joint ventures in China. From an accounting perspective, GM treated the automotive China joint ventures as associates rather than subsidiaries.

Here is a quote taken from the company’s financial report regarding non-consolidated affiliates (China Joint Ventures):

“Nonconsolidated affiliates are entities in which an equity ownership interest is maintained and for which the equity method of accounting is used due to our ability to exert significant influence over decisions relating to their operating and financial affairs. Revenue and expenses of our joint ventures are not consolidated into our financial statements; rather, our proportionate share of the earnings of each joint venture is reflected as Equity income.”

To find out the number of vehicle deliveries as well as the equity income from China, you can visit this webpage: GM’s revenue streams from China.

GM Financial

As mentioned, GM Financial is one of the major business segments and it provides automotive financing services. As shown in the GM’s revenue disaggregations snapshot in the previous discussion, revenue from GM Financial is mainly made up of leased vehicle income, retail finance charge income and commercial finance charge income.

Gross Margin

There is no gross margin associated with GM’s total revenue as there is no cost of sales for GM Financial. GM Financial is not a retail business where it sells any physical products. Rather, it provides financial services such as loan and borrowing to both retail and commercial customers through its dealers’ network.

As shown in the snapshot below, GM discloses a lumped sum of operating expenses associated with GM Financial revenue. In other words, we can extract GM Financial operating income directly from the disclosed operating expenses.

GM Financial operating expenses

GM Financial operating expenses

While there is no gross margin associated with GM’s total revenue, we still can measure the gross margin for GM’s automotive business by deducting the cost of automotive sales from the respective automotive revenue.

Readers who are keen to know about GM’s automotive revenue and its respective gross margin, please visit this post: GM Automotive Revenue and Gross Margin.

We are all set and let’s move on to GM’s total revenue chart below.

Chart of GM’s Total Revenue

GM total revenue

GM total revenue

The chart above represents GM’s quarterly net sales and revenue in the past 5 years from 2015 to 2010. The total revenue data sums up the revenue sources from both GM automotive and GM Financial and minus all the discounts and taxes collected.

The trend of the plot shows that GM’s total revenue may have already peaked in 2016 and has since started to decline. Quarterly total revenue was the highest at nearly $45 billion in 4Q16. However, total revenue has since trended downward, hitting a low point of only $16.8 billion in Q2 2020.

Quarterly total revenue of $16.8 billion posted in 2Q 2020 was a record low for GM and the figure was 53.5% lower compared to a year ago. In terms of sequential growth, GM’s Q2 2020 result was 48.7% lower compared to the prior quarter.

The fact is that GM made about $35 billion of quarterly sales in 2015 and yet, its quarterly sales after 4 years, has seen no improvement but further plunged to less than $25 billion on average in 2020, representing a drop of roughly 30% over the 5-year period.

In short, GM’s revenue growth has been heading lower over the past 5 years and the impact of the decline may affect shareholders’ return especially in the form of dividends that the company has been paying since 2014 as well as the stock price.

Chart of GM’s Revenue By Segment

GM revenue by segment

GM revenue by segment

The chart above shows the quarterly revenue breakdown into two major business segments: (1)Automotive and (2)GM Financial.

As mentioned in the prior discussion, automotive revenue consists of the sum of all revenues from GM North America, GM International, GM Europe and GM Corporate.

In the current chart, automotive revenue makes up the bulk of GM’s net revenue, averaging around 90% of sales to GM’s coffers. The remaining revenue is contributed by GM Financial.

Although automotive revenue contributes the biggest portion of sales to GM, its revenue growth has been trending downward and reached a record low in 2Q 2020 at only $13.4 billion, a figure which was more than 50% lower compared to the result a year ago.

On the other hand, GM Financial, the financial arm of GM, saw its quarterly revenue declined slightly to $3.4 billion in Q2 2020, which represents a year over year drop of about 5%.

While GM Financial recorded negative comparable and sequential growth in 2Q20, the long-term trend of the plot shows that the business segment has been holding up pretty strong in the last 5 years.

Also, the quarterly revenue that came from GM’s automotive segment seems to be swinging wildly over the 5-year period, indicating that GM’s automotive business segment is operating in a highly cyclical and unpredictable market. This shows that consumers’ preference over GM’s automotive products can change dramatically in a matter of just a few months and is highly dependent on the general economic condition.

In contrast, GM Financial revenue seems to be more stable and does not change as significantly as its automotive counterpart. In fact, GM Financial revenue has actually increased over the course of the 5-year period, albeit rather slowly. This behavior is sort of expected as financial products do not rely heavily on consumers’ preference and market cyclicality.

Chart of GM’s Revenue By Region

GM revenue by region

GM revenue by region

The chart above shows the further breakdown of GM’s automotive revenue into geographical regions such as GM North America (GMNA), GM International (GMI) and GM Europe (GME).

Without a doubt, GMNA has been the largest revenue contributor to GM automotive revenue over the last 5 years, making up close to 80% of automotive revenue on average. The 2nd spot goes to GMI at roughly 14% of automotive revenue on average. The revenue from GME has ceased to exist after 2017 when the subsidiary was sold off in the same year.

While GMNA has contributed to the bulk of total sales, its respective growth was seen dropping dramatically. In 2Q 2020, GM North America posted sales of only $11.6 billion which is a record low for the company. The figure represents a year over year decline of 60%.

The downtrend occurred not only to GMNA but also to GM International which recorded quarterly sales of only $1.68 billion in Q2 2020. In terms of year on year basis, GMI posted a similar 60% revenue decline in 2Q20.

Again, GM North America and GMI automotive segments are highly cyclical and unpredictable as seen from the dramatic changes in revenue from these regions, indicating that GM is operating in a very competitive environment.

An event as severe as the COVID-19 outbreak has definitely caused the sales of GM’s automotive business to spiral downward.

In short, over the 5 years from 2015 to 2019, GMNA has seen its sales seriously deteriorating while GMI’s revenue has more or less remained flat.

GM’s Revenue Quarterly Growth Rate (QoQ)

GM revenue QoQ growth

GM revenue QoQ growth

The plot above shows the sequential growth rate of GM’s quarterly revenue from 2015 to 2020.

Out of the 21 quarters shown in the chart, 10 of them are in the negative region. In addition, 2017 was the year with the worst quarterly growth when 3 out of 4 quarters were seen having a negative growth rate in the double-digit figures. Part of the reason for the drop in revenue was attributed to the sales of the GM Europe subsidiary in 2017.

In addition, GM posted the worst drop in quarterly revenue in 2Q20 when the sequential growth rate was at a staggering figure of -48.7%. 2020 was definitely the worst year for GM as the company grabbled with the declining sales largely caused by the coronavirus pandemic.

GM Revenue Year Over Year (YoY) Growth Rate

GM revenue YoY growth

GM revenue YoY growth

The chart above shows the year over year (YoY) growth of GM’s quarterly revenue from 2015 to 2020.

Year over year growth rate for total revenue has probably topped out in 2016 as seen from all the positive growth rates recorded in 2016. Since then, revenue YoY growth has slumped and showed the worst result in 2017 when most quarters posted negative numbers.

Total revenue YoY growth has also been vastly negative in 2019, as seen from all the negative numbers throughout 2019. GM saw the worst revenue drop in Q2 2020 when YoY growth rate was -50% as shown in the chart.

On average, GM’s revenue YoY growth rate is around -5%. In other words, quarterly revenue year over year growth has slightly declined on average of 5% in the past 5 years.

Chart of GM’s Quarterly Operating Income

GM operating income

GM operating income

With all the revenues that GM has been generating, how do they translate to operating profits or incomes?

In this matter, I have created the chart above that illustrates GM quarterly operating income from 2015 to 2020.

Operating income is the profit measured after all costs and expenses of running the business are deducted. As such, operating income focuses on the strength of GM’s core business by excluding all non-core business items.

From the chart, GM operating profit has grown quite significantly from 2015 to 2016. The upward trend also corresponds to the revenue growth seen during the same years. Over the 2 years, GM’s quarterly operating income grew from $0.7 billion in 1Q15 to about $3 billion in 3Q16.

From 2016 and onward, GM’s operating income stayed relatively flat before slowly declining and reached the lowest point at $0.5 billion in 1Q18. After that, operating income recovered to $2.5 billion in 3Q19. However, GM’s operating income turned negative in Q4 2019 for the first time over the 5-year period. From the chart, GM suffered a loss of about $500 million in its core operation in that quarter.

A detailed investigation into GM’s financials revealed that the company’s record loss in 4Q 2019 was largely due to the labor disruption in North America which has caused vehicle production cut in the same quarter.

Fortunately, the UAW strike has been a one-off event that GM has successfully resolved and vehicle production has resumed since then.

However, GM’s operating income plunged again in 2Q20, spiraling downward to -$1.2 billion. In other words, GM made a loss of more than $1 billion in 2Q20 alone, an event largely caused by the plunging demand for vehicles due to the COVID-19 pandemic.

Chart of GM’s Operating Margin

GM operating margin

GM operating margin

The chart above shows GM’s operating margin from 2015 to 2020 on a trailing 12-month (TTM) basis.

The operating margin illustrates GM’s profitability from its core operations, which in this case are the company’s automotive and financial businesses.

As shown from the chart above, GM’s operating margin has been on a decline in the last 5 years and reached a low point of only 1% as of 2Q20.

Is that bad or good? From the number alone, it looks pretty awful as the decline suggests the company’s narrowing profitability. However, this figure needs to be compared with the industry average to arrive at a conclusion.

GM’s Operating Income by Business Segment

GM operating income by segment

GM operating income by segment

I have further broken down the total operating income into two major segments: (1) GM automotive and (2)GM financial.

As seen from the chart, GM automotive operating income has been wildly dramatic as depicted over the huge difference between the highest and lowest points. For instance, GM made nearly $3 billion of operating income in some of the quarters in 2016. Yet, operating income could drop to as low as $500 million in 1Q18 and even turned negative in 4Q19 and 2Q20. GM automotive suffered nearly $1 billion and $1.4 billion in operating loss in 4Q19 and 2Q20, respectively.

In line with automotive revenue, the dramatic changes in automotive income prove that GM’s automotive business is highly cyclical and wildly unpredictable. There are just too many factors that could affect the company’s ability to squeeze profit out of the respective revenue. As mentioned, the labor disruption is just one of these factors and it had severely impacted the automotive segment as the company has just lost over $1 billion in operation for the first time over the last 5 years.

Similarly, GM suffered an even greater loss in 2Q 2020 of close to $1.4 billion due to the disruption in the automotive industry brought by the COVID-19 outbreak.

In contrast, GM Financial operating income has been more predictable and has, in fact, increased significantly in the last 5 years. While GM suffered a huge operating loss in 4Q 2019 and 2Q 2020, GM Financial has actually generated an operating profit of nearly $500 million and $180 million in each of this quarter respectively, illustrating that the financial arm of the company has been pretty resilient to various market conditions.

GM’s Operating Margin by Business Segment

GM operating margin comparison

GM operating margin comparison

The previous operating income chart shows that GM automotive operating profit is roughly 2X-5X the size of GM Financial on an absolute value basis. While a larger profit may seem to be a good thing, it does not necessarily mean that the respective business segment is more profitable.

For this reason, I have created the operating margin chart above to show investors which business segment squeezes more profit out of its respective revenue. In order words, the operating margin measures the amount of profitability of the business segment with respect to net sales.

As seen from the current chart, it’s very obvious that GM Financial is the clear winner when it comes to profitability as reflected from its higher operating margin which averages around 10% on a trailing 12-month (TTM) basis.

On the other hand, GM automotive operating margin has been mostly in the low single-digit, indicating that it is a low profitability business. What is worst is that GM automotive operating margin has been slowly declining and even turned negative as of 2Q 2020.

Moreover, the trend of both plots is seen to be heading in the opposite direction in recent years. Since 2017, GM Financial quarterly operating margin has been trending upward from 10% to nearly 14% by the end of 2019.

In contrast, GM automotive operating margin was seen heading lower towards the low single-digit region in 2019.

As of Q2 2020, both business segments operating margin headed lower to about 10% and 0% for GM Financial and automotive respectively, thanks to the COVID-19 disruption in the automobile sector.

The results show that GM Financial operating margin has been steadily improving while GM automotive has been worsening.

In short, GM Financial is 3X-5X more profitable than GM automotive.

Conclusion

GM’s total revenue or net revenue has been trending lower in the last 5 years, indicating that the demand for its product has also been heading lower. The worst quarter was seen in 2Q20 when quarterly revenue declined nearly 50% on a year on year and sequential basis.

In terms of profitability, GM Financial was seen holding up and still generated an operating profit of $180 million in 2Q20 compared to a loss of $1.4 billion in the automotive sector.

The operating margin analysis shows that GM Financial is profoundly more profitable than the automotive segment.

References and Credits

1. Financial figures in all charts above were obtained from financial statements available in General Motors Investor Relations.

2. GMC Sierra HD Denali image is used under creative commons license and sourced from the following websites: GMC Sierra.

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