General Motors delivered a solid $2.4 billion profit from continuing operations in the second quarter, handily beating Wall Street expectations, despite a $400 million drop in revenue, proving Chief Executive Mary Barra has a good handle on operations even under less-than-ideal circumstances.
But GM shares barely budged Tuesday, with investors continuing to wring their hands over whether GM will be able to adjust to a slowing U.S. market.
Compare that to the reaction last week, when Tesla CEO Elon Musk tweeted that he’d received “verbal” government approval to proceed with plans to build a high-speed underground transit line that would shuttle passengers between New York and Washington, D.C. in as little as 29 minutes. While no one seems to know what that means or whether his plan will ever come to fruition, Tesla stock jumped $4.66 from the prior day.
And there’s continued excitement among investors about Tesla’s launch of the Model 3, a $35,000 plug-in car, which Musk promises will be spewing out of its Fremont, Calif., factory at a rate of 1,000 per day by the end of December. So far, the Model 3 is a long way from mass production. The first 30 cars will be delivered to customers at a celebration on July 28. GM builds 30 cars in 30 minutes.
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Wall Street tends to hold GM and Tesla to different standards. Under Barra’s leadership, GM has consistently met or exceeded its financial commitments, earning $22 billion in net income during the three years she’s been in charge. Tesla has yet to post an annual net profit, but Musk has had no problem attracting investors to keep his expansion plan going.
Why does Mary Barra lack the credibility that investors have so easily awarded to Elon Musk?
One reason, certainly, is that General Motors has a history of disappointing investors, never more profoundly than in 2009, when it filed for bankruptcy, wiping out shareholders’ entire stake. That was four and a half years before she became CEO, but it’s baggage she must carry nonetheless.
Timing is also an issue. Despite GM’s earnings track record under Barra, the industry is heading into a cyclical downturn, and investors are assuming GM’s performance will tank. The company has said it will cut car production to meet lower demand, but insists it will be able to offset lost profits with cost cuts and improvements elsewhere in the business.
Barclay’s analyst Brian Johnson said GM deserves credit for managing these ongoing headwinds while staying at the forefront of disruptive technology changes like electrification and self-driving cars. But “it’s been tough for GM to get any love amid the cycle talk,” he says.
Generally speaking, investors care about where a company is headed, not where it’s been. And in this regard, Wall Street seems to be more excited about Elon Musk’s dream than about Mary Barra’s strategy.
But anyone who bothers to study GM’s plan will see that its strategy lines up nicely with where the market is headed. Building on the success of its redesigned Chevrolet Equinox and GMC Acadia, it has a slew of high-margin SUVs and crossovers hitting the market in the coming months, including the Chevy Traverse, GMC Terrain and Buick Enclave. Then next year, it will launch all-new versions of its full-size Chevy Silverado and GMC Sierra pickups, followed by redesigns of its hugely profitable big SUVs including the Chevrolet Tahoe and Suburban and the Cadillac Escalade.
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Meanwhile, it’s also leading the way toward what Barra calls “Autos 2.0” – where car buyers become mobility subscribers. GM has made important advances in autonomous technology and electrification, like the 180 or so self-driving Chevrolet Bolt EVs currently undergoing testing in San Francisco’s choked streets ahead of the planned commercial launch of a self-driving taxi fleet.
Barra and GM’s chief financial officer, Chuck Stevens, have often sounded like a broken record, assuring investors that despite economic headwinds, and hefty investments in future technology, GM can continue to deliver 10% profit margins in the U.S. for the foreseeable future.
Unlike Musk, they’ll have to prove it before Wall Street buys it. – Written by ,