GM Gears Up for Post-Strike Growth After Slashing Outlook

(Bloomberg) -- General Motors Co. is looking to put a six-week strike that cost about $2.9 billion in the rear-view mirror as it swings into full production of highly profitable trucks.

The automaker said Tuesday the walkout by unionized workers at U.S. plants, which ended last week, eroded free cash flow and forced it to lower its 2019 earnings forecast by $2 a share. But the damage wasn’t as severe as some analysts predicted, with third-quarter results handily beating the average estimate, and GM shares rose the most since June.

“The underlying business was very strong,” Chief Financial Officer Dhivya Suryadevara told Bloomberg Television, noting that absent the strike GM would still be on the target it set in January for full-year earnings of $6.50 to $7 a share. “That’s what we’re focusing on as we move forward.”

Adjusted earnings for the third quarter, which treated costs from the strike and other charges as one-time items, were $1.72 a share, beating the average analyst estimate of $1.29. GM’s shares rose 5% to a nearly five-month high of $38.48 at 12:10 p.m. in New York.

The company is banking on strong demand for its new Chevrolet Silverado and GMC Sierra pickups, which are big money makers. Sales of higher-volume, light-duty versions of those trucks rose 18% for the Chevy and 38% for the Sierra in the quarter.

Break Even Unchanged

Suryadevara said despite the higher wages, GM can still break even in a U.S. vehicle market that falls from today’s levels of about 17 million vehicles a year to as few as 10 million. “We’ve preserved our ability to navigate through a downturn,” she said.

The work stoppage depleted GM’s cash flow, as the company cut 2019 guidance to zero to $1 billion. It had earlier projected cash flow of $4.5 billion to $6 billion for the year.

“This keeps GM on track with its restructuring targets although cash delivery continues to be delayed,” Jefferies analyst Philippe Houchois, who rates the company as a hold, said in a research note.

GM will need to maintain strong cash flow to fund an aggressive shift toward electrification on its vehicle lineup. Chief Executive Officer Mary Barra said on a call with analysts that she plans to spend more of her R&D budget on electric vehicles than on conventional models. GM has said it plans to build 20 of those vehicles globally by 2023 and that it expects them to be profitable.

China Woes

If not for the strike, GM would have turned out a record quarter. Its full-size trucks are finally getting some momentum after a yearlong roll-out. Chevrolet Silverado sales rose 18%, and the GMC Sierra was up 38% in the quarter. GM said its trucks gained retail market share in all three months in the quarter.

“Simply, the strike did not significantly alter GM’s steady state financial profile,” Dan Levy, analyst at Credit Suisse, wrote in a note to clients.

One ongoing problem is China, the world’s largest auto market, where the automaker’s operations are struggling amid a broader downturn. That helped pull down sales of GM vehicles in Asia below deliveries in North America for the first time since 2011.

GM’s income from its joint ventures in China fell to $282 million from $485 million in the year-earlier quarter. Barra said the company “underperformed” in the Chinese market, where industrywide sales fell 11% in the third quarter. “The business environment remains challenging and volatile,” she said.

The automaker also lost $251 million on its Cruise LLC self-driving car business. The unit is still in startup mode and had no revenue in the quarter. The business lost $214 million a year earlier.

Fourth-Quarter Impact

For GM, the strike’s impact is two-fold. It not only hit profits for this year but also adds $100 million a year to its labor costs going forward, according to an estimate from Credit Suisse. But GM says those higher upfront costs will pay off over the log term.

“While this labor agreement is inflationary, we expect to offset incremental economics over the contract period with productivity initiatives.,” Suryadevara told analysts.

The strike hit GM’s profit by $1 billion in the third quarter alone, the company said in a statement. That contributed to a cut in its full-year adjusted earnings per share estimate to a range of $4.50 to $4.80, down from the earlier projection of $6.50 to $7 a share.

The labor action started on Sept. 16 at the tail end of the quarter, chopping earnings by 52 cents a share, so most of the damage will come in the year’s final three months. By the time the year is over, GM said the impact would reach $3.8 billion to $4 billion on the basis of earnings before interest and taxes.

CFO Suryadevara told reporters in a briefing that GM lost 300,000 vehicles of production to the strike and that its ability to quickly make that up “will be limited.” But she added that if demand holds up next year, GM will have additional capacity to boost output.

The walkout wasn’t the only thing taking a toll on the automaker. GM also repriced its stakes in Lyft Inc. and French carmaker Peugeot SA, which lowered profit by another 15 cents a share. GM owns 6.7% of Lyft and has warrants in Peugeot.

--With assistance from Keith Naughton and David Westin.

To contact the reporter on this story: David Welch in Southfield at dwelch12@bloomberg.net

To contact the editors responsible for this story: Kevin Miller at kmiller@bloomberg.net, Chester Dawson

©2019 Bloomberg L.P.