Bets on driverless-car efforts, new industry technologies help
to dispel 'dinosaur' image
By John D. Stoll
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 23, 2017).
After spending years frustrated by Wall Street's lack of
interest in record profits, a fortress balance sheet and a revamped
approach to selling cars, General Motors Co. has decided to change
its story. And investors are finally listening.
GM reports third-quarter earnings Tuesday following a flurry of
announcements about rapid advances in driverless-car development.
The company's share price -- stuck in neutral during Chief
Executive Mary Barra's nearly four-year tenure -- is springing to
life, trading well above the previous highs notched since GM's 2010
initial public offering.
The company's $66.5 billion market value firmly outpaces Ford
Motor Co., whose shares have languished in recent years, and Fiat
Chrysler Automobiles, which is valued far below GM but trading near
a several-year high amid rampant takeover rumors. But more
important than beating Detroit rivals, the largest U.S. auto maker
appears to be lapping Tesla Inc., a small electric-vehicle maker
held up as the auto industry's future.
Tesla, founded by billionaire Elon Musk, stole the crown as
highest-valued domestic auto maker earlier this year. Production
hiccups with its new Model 3 mass-market sedan, however, have
dampened enthusiasm for Mr. Musk's plan.
"We see potential for investors, both auto and non-auto, to view
GM's progress and Tesla's production challenges as a sign that some
of Tesla's market cap needs to go back to GM," Barclays auto
analyst Brian Johnson wrote in a recent note to investors. GM has
been underestimated in the emerging automotive tech race, he said,
and shouldn't necessarily take a back seat to Silicon Valley's
newcomers, including Alphabet Inc.'s Waymo and Uber Technologies
Inc.
A GM spokesman said that while the company is pleased with its
recent share gains, it continues to believe the stock is
undervalued. GM remains focused on "delivering strong and
consistent results" and generating higher returns for shareholders,
he said.
Ms. Barra began building the case for GM as a new-mobility
pioneer in early 2016, sinking $500 million in ride-hailing company
Lyft Inc. and purchasing Cruise Automation, a Silicon Valley
startup focused on autonomous cars. The value of Lyft has doubled
since then, and Cruise's staff has grown to about 350 from 40, with
employees saying GM's ownership provides a smoother pathway to the
mass production of robotaxis.
Cruise earlier this month acquired Strobe Inc., a company that
makes low-cost "lidar," or the laser/radar technology that serves
as an autonomous car's eyes and ears. These developments, combined
with momentum on electric vehicles, have killed the suggestion that
GM is "a dying dinosaur," Mr. Johnson said.
The pressure, however, isn't off Ms. Barra as she chases the
lofty target of being the world's most valued automotive company.
Joseph Spak, an RBC Capital Markets auto analyst, said investors
need to question whether GM is adequately funding technology play
that "may burn cash for a long time." And there is no clear
strategy to make money on self-driving cars, electric vehicles and
ride sharing.
The car business, meanwhile, faces headwinds, with GM poised to
report a 33% decline in operating profit for the quarter ended
Sept. 30. GM's North American production declined 25% during the
third quarter, according to WardsAuto.com.
Lower output is due to slumping demand for GM's bread-and-butter
family cars, luxury sedans and compact vehicles, as well as other
production-related factors. Revenue is booked at the point of
production, so slower factories likely hit GM's top line hard.
Adding further pressure is the company's increased reliance on
sales incentives during the summer as it cleared excess inventory
off dealer lots and spent heavily on disaster-relief programs in
September.
Ms. Barra, however, is reducing GM's exposure to volatile
markets at a time when many of her competitors are embracing them.
GM closed the sale of its money-losing European business in August,
shortly after exiting the Indian and Russian markets. More
recently, it consolidated all of its remaining non-China
international businesses into a single operation and shuttered
production in Australia.
These moves could help GM maintain its record profit clip, even
if volumes in China and the U.S. fall off all-time highs. The
company forecasts 10% operating margins in its North America
business, mirroring a profit haul typically enjoyed only by luxury
brands or Toyota Motor Corp.
Ms. Barra's blueprint contrasts domestic counterparts. Analysts
say her ability to create more daylight between GM and its rivals
will further bolster the case for an outsized valuation.
Fiat Chrysler CEO Sergio Marchionne has been slow to embrace
moonshot ideas and has instead focused on finding a partner capable
of boosting the company's scale. Even though Ford is moving ahead
in driverless cars and EVs under a new CEO, the No. 2 U.S. auto
maker's progress is murky and the company's new cost-cutting
efforts appear to be the central narrative. Both companies report
earnings next week.
Tesla, reporting Nov. 1, has a well-publicized list of
challenges, will post deep losses for the July through September
period, according to analyst expectations. The company finished the
latest quarter with $3 billion in cash and plans to spend $2
billion in the second half to make way for the Model 3.
Write to John D. Stoll at john.stoll@wsj.com
(END) Dow Jones Newswires
October 23, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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