Earlier this month, General Engines (GM -3.42%) warned that supply chain constraints would weigh on its second-quarter results. The current global shortage of semiconductors forced the US auto giant to build around 95,000 vehicles without certain components last quarter, delaying deliveries to dealerships.

On Tuesday, the company reported second-quarter results down from its updated guidance range. Investors were unhappy, sending GM shares down more than 3% and leaving them trading at around half the price they had reached in early January.

The general certainly faces some short-term headwinds. But investors aren’t giving the company enough credit for its near-term resilience or long-term upside potential. This makes GM stock a great buy today.

A modest decline in profits

General Motors revenue rose 5% to nearly $36 billion in the second quarter. However, its adjusted operating profit fell 43% year-over-year to just over $2.3 billion. In its guidance update earlier this month, GM estimated it would report second-quarter adjusted operating profit between $2.3 billion and $2.6 billion.

That said, GM faced a very tough year-over-year comparison last quarter. Additionally, about 75% of the vehicles that GM was unable to complete due to chip shortages were full-size trucks and high-margin SUVs. This alone may have resulted in half of the drop in profits from the second quarter of 2021. Additionally, the company’s joint venture equity revenue in China fell by more than $400 million due to temporary production shutdowns related to the pandemic.

Disturbances like these will likely crop up periodically over the next two years. That said, the second quarter was exceptionally bad in this regard. On an annual basis, GM still expects to meet the targets it set earlier this year, calling for adjusted operating profit between $13 billion and $15 billion, adjusted earnings per share between $6.50 and $7.50 and between $7 billion and $9 billion in adjusted free cash flow.

Supply issues persist but demand remains strong

During General Motors’ earnings call, Chief Financial Officer Paul Jacobson acknowledged that chip supply issues continued into July. However, he still expects GM to be able to ship almost all of the incomplete vehicles in its inventory by the end of the year. The company’s forecast range takes into account the risk of some shipments slipping into 2023.

More importantly, demand for GM vehicles remains hot. Inventory remains the main constraint on sales. Dealerships have an average of 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 high demand is not a bad problem to have. So far, GM sees no signs that customers are cutting back on auto spending due to inflation, rising interest rates or recession fears. But even if demand were to slow, GM would have plenty of time to adjust production, greatly reducing the risk of inventory becoming bloated and forcing the company to increase discounts.

Good long-term growth prospects

GM has also made significant progress toward its long-term growth goals in recent months. To give just a few examples:

  • The first electric delivery vehicles from GM subsidiary BrightDrop entered service last quarter.
  • GM announced an agreement to create a nationwide fast-charging network based in hundreds of Pilot and Flying J Travel Centers.
  • The company’s Cruise subsidiary has become the first company to receive a permit to operate a ride-sharing service with autonomous vehicles in California.
  • GM has entered into binding supply agreements covering all the battery raw materials it needs to meet its goal of building 1 million electric vehicles a year in North America by the end of 2025.

As a result, General Motors executives remain confident in the company’s goal of doubling its revenue by 2030 while increasing its profit margin.

In the middle of GM’s target range, operating profit would hit $38 billion by 2030. By comparison, the company’s market capitalization has fallen below $50 billion in recent months. If GM hits even half of its long-term earnings target by 2030, GM stock should deliver above-market returns in years to come. And if GM actually hits its 2030 revenue and profit targets, GM could become one of the best performing stocks of the 2020s.

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