Mary Barra's Biggest Surprise Yet: Making GM's Profit Slowdown-Proof
(Bloomberg) -- It’s time to hand it to General Motors Co. Chief Executive Officer Mary Barra for keeping profits afloat. Her company’s bottom line was supposed to shrink after U.S. auto sales peaked in 2016, but surprise gains keep coming.
The latest was Barra’s forecast Friday that GM may earn about $1 a share more this year than analysts were expecting. Cost cutting is the big reason, along with some key high-margin trucks coming to market.
“Very few companies have made the radical change to its business the way GM did,” said longtime industry watcher Maryann Keller, an independent consultant in Stamford, Connecticut. “This was not a typical round of cuts. There could be repercussions in the long run, but for now it’s working.”
GM has exited money-losing businesses and is emphasizing more expensive models. Selling its German unit Opel eliminated an operation that historically lost about a $1 billion a year, and Barra stopped building vehicles in Russia and India. At home, GM is ditching underperforming models and focusing on raising prices.
“We are unafraid to make bold decisions,” Barra said to investors Friday.
Something to Like
The 57-year-old CEO struck a more optimistic tone than rivals Volkswagen AG, BMW AG and Daimler AG. The three have warned of challenges in the year ahead, including higher materials costs, tougher emissions standards and trade tensions. Ford Motor Co. and Tata Motors Ltd.’s Jaguar Land Rover also are slashing thousands of jobs in Europe.
“The auto industry is one that not many people like right now, but GM is giving them a reason to like it,” said Kieran Ryan, a Bloomberg Intelligence analyst.
GM shares surged as much as 9.3 percent to $37.97 as of 2:45 p.m. in New York. The stock is among the biggest gainers in the S&P 500 on Friday and is bouncing back somewhat from last year’s 18 percent plunge.
This isn’t the first time GM performed beyond expectations:
- GM surprised analysts in 2015, when it rode momentum in the U.S. truck market and Cadillac grew in China, where luxury sales were taking off.
- In mid-2016, GM raised its guidance and posted a big second quarter after showing better profits in the U.S. and a small profit in Europe, which had been a perennial money loser.
- In the third quarter last year, GM shares jumped almost 9 percent when adjusted profit rose despite lower sales; investors had expected a decline. The company saw stronger deliveries in China and squeezed out higher prices on its U.S. trucks.
GM plans to increase earnings by cutting thousands of salaried workers and closing five North American plants to save as much as $2.5 billion this year, or about $1.80 a share. That more than accounts for company’s surprise guidance for adjusted profit of $6.50 to $7 a share. Analysts had expected $5.92 a share for this year.
GM forecasts industry sales in the U.S. probably will be in the low 17-million-vehicle range this year, compared with about 17.3 million in 2018. Deliveries in China may be close to last year’s almost 27 million. But even as its two major markets stall, GM expects to boost earnings by building up its supply of new pickups, which started selling in limited numbers in the third quarter.
About half the current inventory of its top-selling Chevrolet Silverado is the older model, Sandor Piszar, director of marketing for the brand, said in a briefing last week. GM also has the new Cadillac XT4 and Chevy Blazer SUVs coming this year.
And the company does see some potential in China. The market was down last year, but Cadillac was up 20 percent and should keep growing, Matt Tsien, president of GM China, said during an investor presentation.
While European automakers cut profit forecasts as they spend on new technology to meet future clean-air rules, GM has largely maintained earnings. The company has trimmed the weight of new models by as much as 400 pounds in the past several years with lightweight steel and aluminum, President Mark Reuss said. The Detroit-based company made the investment when sales were growing, so the impact on earnings is less now, he added.
Barra’s strategy of eliminating weak businesses does come with risk, Keller said. GM is getting rid of some passenger cars in the U.S. and exiting markets around the globe, which means the CEO must put up bigger profits with a smaller company. It could be exposed if consumer preferences shift away from SUVs or the U.S. or China markets slump.
“Will there be repercussions later? Maybe,” Keller said. “But in the near term, it works.”
David Kudla, founder and CEO of Mainstay Capital Management, has invested in GM in the past but doesn’t own shares now. He said Barra’s management has kept profits afloat and has impressed, but he isn’t sold on forecasts that vehicle sales will hold, which could make another surprise tough to pull off.
“Barra has done a good job of keeping margins up with flat sales,” said Kudla, who’s based in Grand Blanc, Michigan. “But I think sales will fall in the U.S. at a pretty big clip and China is down. They are going to have points in time where they put up good numbers, but it’s still going to be a tough space.”
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