GM's Profit Falls as It Pulls Back Abroad to Bet on U.S. Market -- 2nd Update
July 25 2017 - 4:14PM
Dow Jones News
By Mike Colias
General Motors Co. provided a clearer portrait of its future,
revealing how big a bet it is placing on the continued strength of
U.S. buyers.
The company's financial performance, reported Tuesday, was
dented by moves it is making to exit Europe and certain emerging
markets. More than $1 billion in costs led to a 42% plunge in
second-quarter earnings to $1.7 billion and overshadowed the
underlying strength of its core North American operation.
The Detroit auto giant said the short-term pain is worth it,
with Chief Executive Mary Barra saying that selling its
money-losing Opel unit and shuttering operations in India and South
Africa "will allow us to deploy resources and capital to
higher-return opportunities." Topping that list: a new line of
hulking pickup trucks due in 2018 and the revitalization of
Cadillac's premium product line.
Ms. Barra has benefited from a strengthening U.S. market since
taking GM's helm in 2014, banking record profits and fat margins
that helped the company pay for costly safety recalls and
jump-start its self-driving car efforts. In the second-quarter,
North American margins exceeded 12%, among the healthiest anywhere
in the global auto industry, as customers continued to snap up
Chevy Silverados and Cadillac Escalades that are popular amid cheap
gasoline prices.
Ms. Barra, however, faces one of her thorniest challenges in
more than three years at the helm. She needs to maintain production
discipline and hold incentives in check, a job that is complicated
by the company's drastic pullback from selling to rental-car fleets
that have long been Detroit's biggest customer.
GM's North America unit contributed nearly all of the company's
$3.68 billion in operating profit in the second quarter, dwarfing
the operating profit and equity income derived from its other key
operations -- China and the GM Financial lending arm.
The auto maker enters the second half of 2017 with excess
inventory in North America, resulting from robust production
schedules in the first six months of the year. Nearly 1 million
unsold GM vehicles are sitting on dealer lots, representing 105
days of supply.
Inventories ballooned amid slower-than-expected sales of
passenger cars, which prompted GM to begin cutting production at
several U.S. factories. Other plants will be temporarily idled this
fall so that assembly lines can be prepared for new sport
utilities, pickups and crossover wagons, the hottest models on
dealer lots.
GM Chief Financial Officer Chuck Stevens said the company will
report weaker third-quarter earnings as a result of needed
production cuts. He committed to whittling down excess stock by the
end of the year.
Mr. Stevens said history is on the company's side. The strongest
selling season for trucks is traditionally the second half of the
year, a factor that could offset the negative impact of production
cuts.
"The North American business model is proving to be very
resilient to some of the challenges that we're facing," Mr. Stevens
said. GM should finish 2017 with 10% pretax operating margin and
could hit that level again next year, he said.
Barclays analyst Brian Johnson said GM "deserves credit" for
sticking by its 2017 profit forecast of $6 to $6.50 per share even
amid weaker-than-expected demand, and he believes the company could
finish at the high end of that range. Still, he warned in a
research note that next year could get tougher as falling industry
sales pressure profit margins.
"The risk of negative earnings revisions of '18 estimates could
pressure GM," he wrote.
For the second quarter, GM posted operating profit of $1.89 per
share, breezing past Wall Street expectations of $1.69 per share.
The per-share figure excludes results from GM's Opel business in
Europe, which is slated to be sold to French car maker Peugeot by
year's end.
China -- GM's No. 2 profit generator and top market by sales
volume -- continued to provide steady income of about $500 million,
even amid flattening consumer demand as sales of pricier SUVs and
GM's Cadillac luxury line padded profits.
GM got a lift from a nascent recovery in South America, which
has been a drag on the bottom line in recent quarters. The company
trimmed its losses to $23 million, from $118 million a year
earlier, and said it expects further improvements through the rest
of the year.
Write to Mike Colias at Mike.Colias@wsj.com
(END) Dow Jones Newswires
July 25, 2017 15:59 ET (19:59 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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