Interactive Investor

General Motors is moving up a gear

11th August 2021 11:08

Rodney Hobson from interactive investor

Our overseas investing expert considers the investment merits of four US corporate giants including GM and Kraft Heinz.

Second-quarter results from US companies continue to pour in – and investors need to pick their way carefully through a minefield as some comparisons with last year’s April-June period are distorted by the effects of Covid-19 shutdowns.

Life is certainly moving up a gear at vehicle maker General Motors (NYSE:GM). This time last year sales plummeted during the worst impact of the pandemic and GM made a $758 million (£548 million) net loss.

This year, the second-quarter swung it to a $2.84 billion profit as revenue more than doubled from $16.8 billion to $34.2 billion. Furthermore, GM raised its forecast for net income for the full year from $7.7 billion to $9.2 billion.

The motor industry is likely to be one of the major beneficiaries of US government measures to fire up the American economy.

Some caution is required, given that vehicle sales were hit particularly badly last year, so a particularly spectacular rebound was to be expected.

Many companies and individuals will be anxious to upgrade cars and trucks that they intended replacing 12 months ago and that are now correspondingly older.

Likewise GM was naturally cautious in its earlier profits forecasts until it could be sure that life really was returning to normal, so an upgrade was almost inevitable.

Another concern is that GM, like other vehicle makers, will have to invest heavily as the industry moves away from petrol and diesel to hybrids and all-electric.

The company said it is increasing its investment in electric vehicles and self-driving technology from $27 billion to $35 billion in 2025.

Certainly the markets reacted to the figures with caution as the shares quickly shed 8%. They were as low as $18 at the start of April last year before racing away to an optimistic $63 in June this year.

A bout of profit-taking was inevitable and the current price is around $54, still well above the pre-pandemic peak of $46. There is no dividend.

Source: interactive investor. Past performance is not a guide to future performance

The opposite situation has occurred at Kraft Heinz (NASDAQ:KHC), which sold more of its food products such as cornflakes and soup a year ago to customers catering for themselves through self-isolation and the closure of restaurants.

This time sales slipped 0.5% year-on-year from $6.65 billion to $6.62 billion but were still 3.2% up on the same quarter of 2019.

More worrying is that writing down the value of brands means Kraft is still making a net loss and although the deficit narrowed dramatically from $1.65 billion to $25 million, that was entirely caused by the hefty writedowns on brands such Maxwell House last year.

There are further distortions caused by the return of price discounts on catering and retail sales that Kraft did not feel were necessary last year when sales were rolling along nicely anyway.

Kraft did make an underlying profit, which allowed the compensation of a 40 cents a share dividend in line with the previous nine quarters. That gives a yield of 4.3% at the current share price around $37.

Sales are likely to be down slightly in the third quarter but the full year should be stronger than originally expected and chief executive Miguel Patricio is confident the group will come out of the pandemic stronger than it went in.

The shares remain above the $30 I suggested buying at in the past but are slipping at the moment, which could open up a new buying opportunity.

Source: interactive investor. Past performance is not a guide to future performance

The ups and downs of the pandemic has had much less effect on electric power and natural gas company Duke Energy (NYSE:DUK) so comparisons with last year are correspondingly more meaningful.

Underlying earnings rose from $1.12 to $1.15 a share, beating expectations of a slight fall. Revenue edged up from $5.42 billion to $5.76 billion.

Projected earnings for the full year, of $5-5.30, were reaffirmed and the company expects earnings to grow 5-7% a year over the next four years.

Source: interactive investor. Past performance is not a guide to future performance

In contrast, Dominion Energy (NYSE:D) fell slightly short of expectations, although the operating earnings of 74 cents a shares was within the company’s own guidance range. Revenue of just over $3 billion, down 2.2%, was also underwhelming.

Another worry is a 16% rise in operating costs, including higher maintenance charges and the cost of buying gas.

Dominion shares are quite volatile, moving between $89 and $67 in the past 18 months, and are currently slipping at around $77.

The big plus point is a yield of 3.7% but with capital expenditure set to rise that may not be enough to prevent another dip below $70.

Source: interactive investor. Past performance is not a guide to future performance

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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