GM's Second-Quarter Profit More Than Doubles--3rd Update
July 21 2016 - 4:11PM
Dow Jones News
By Gautham Nagesh
General Motors Co. posted its best financial quarter in the
seven years since filing bankruptcy, but Brexit concerns have the
Detroit auto giant raising a caution flag for the back half of
2016.
Bolstered by strong pickup truck and SUV production in North
America, GM's operating profit widely outpaced analyst expectations
in the second quarter. Net profit, which more than doubled to $2.9
billion, and revenue of $42.4 billion, up 11% versus the second
quarter of 2015, represented two of the 19 quarterly postbankruptcy
records the auto maker said it set in the three months ending June
30.
Even while earning $137 million in Europe during the second
quarter, its first profitable period in the region since 2011,
Chief Financial Officer Chuck Stevens signaled concern about the
potential hit to earnings due to the U.K.'s decision to exit the
European Unit. Citing a weakening British pound and softening of
U.K demand, the company estimates $400 million in potential
second-half impact due to Brexit, possibly knocking GM off its goal
of reporting black ink in Europe on an annual basis for the first
time since 1998.
"The Brexit vote has created a potentially significant
headwind," Mr. Stevens said when discussing earnings Thursday, but
reiterated the company still aims to meet its projection. "This is
a speed bump along the way that we're going to deal with." Cost
cuts and pricing changes could soften Brexit's blow, he said.
Missing the Europe profit target would be a rare misstep for
Chief Executive Mary Barra, who took the helm in 2014 on the eve of
the disclosure of a major vehicle-safety crisis. With that episode
largely in the rearview mirror, Ms. Barra has consistently asked
investors to judge her by results and not by lofty projections.
GM's global operating margin of 9.3% indicates the company is
well on track to meet its longer term profit goals. GM shares
traded up 1.7% in afternoon trading Thursday, exchanging hands at
$32.02, or about a dollar shy of the company's 2010 initial public
offering price.
Second-quarter results were benefited by $3.6 billion in
operating profit in North America on GM's sharp increase in
high-margin truck and sport-utility production, a move aimed at
stocking dealer lots ahead of the summer selling season. GM books
revenue and profits at the point of production, a strategy that
allowed the company to offset concerns about the sizable amount of
market share it lost in the period compared with the same quarter
in 2015.
GM's North American earnings represented 90% of global operating
profit for the quarter, and the region's 12.1% operating margin was
a key factor driving global results and a 25-cents-per-share
increase in its 2016 earnings estimate. Continued growth in China
-- GM's largest market -- also boosted optimism.
Fearing a peak in U.S. light-vehicle demand, however, Ms. Barra
has aggressively retooled for the future. The early months of 2016
included significant investment announcements, including a $500
million stake in ride-sharing firm Lyft Inc. Ms. Barra declined to
say whether GM will participate in additional funding rounds, but
said the "alliance" has met expectations this far.
The company on Thursday said in a regulatory filing its deal to
purchase Silicon Valley autonomous-car developer, Cruise Automation
Inc., was valued at nearly $700 million when it closed in May. That
sum includes certain retention bonuses for certain Cruise
employees, but doesn't reflect other undisclosed performance awards
tied to technology and commercialization milestones.
Speaking to analysts, Ms. Barra said GM was drawn to Cruise by
its expertise in machine learning and artificial intelligence, two
areas considered crucial to the development of fully autonomous
vehicles. GM engineers, including those acquired in the Cruise
deal, are testing autonomous Chevrolet Bolt electric cars in San
Francisco.
Edward Jones senior equity analyst Jeff Windau said GM's
management team is executing "very well" amid favorable market
conditions. Low fuel prices have ratcheted up demand for the
heavier and pricier light trucks that represent Detroit's sweet
spot, and low industry inventories have limited the need for
incentives.
Mr. Windau, however, said softening demand in the U.S. could
impact GM's ability to maintain its discipline on pricing. Weakness
in South America and uncertainty in Europe -- fueled partially by
Brexit -- presents risks.
GM also said in a regulatory filing it could be forced to
eventually recall an additional 4.3 million vehicles equipped with
Takata Corp. air bags, leading to costs totaling $550 million. The
components are part of a wider industry recall of tens of millions
of Takata air bags that run the risk of rupturing and spraying
shrapnel.
--Mike Spector and John D. Stoll contributed to this article
Write to Gautham Nagesh at gautham.nagesh@wsj.com
(END) Dow Jones Newswires
July 21, 2016 15:56 ET (19:56 GMT)
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