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GM Handily Beats Earnings Forecast, Buoyed by Truck Sales

Shares soar in pre-bell trading.

by on Oct.31, 2018

GM's Renaissance Center headquarters in Detroit.

General Motors delivered a positive surprise to analysts and investors on Wednesday morning, delivering significantly stronger earnings than had been forecast, buoyed by surging demand for its light truck line-up, including the completely redesigned Chevrolet Silverado pickup.

The announcement stands in sharp contrast to rival Ford Motor Co. which, last week, reported a significant decline in third-quarter income, despite strong demand for models like its F-150.

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GM said it earned a net of $2.53 billion during the July-to-September quarter, or $1.75 a share. A year ago, it lost $2.98 billion, or $2.03 a share, though that figure largely reflected the cost of completing the sale of its European-based Opel subsidiary to France’s PSA Group.

(Ford earnings plunge during Q3. Click Here for that story.)

The third-quarter surge sent GM shares sharing in trading ahead of the opening bell on Wall Street, GM shares were up 7.3% to $35.97 at 8:30 a.m. ET in premarket trading — good news for a company that had seen its stock price plunge 19% since the beginning of the year.

The new Chevy Silverado High Country pushes the pickup into a new, more premium segment.

The largest of the U.S. automakers was expected to run in the black, but a survey of analysts by FactSet had found a collective forecast of just $1.25 a share, compared with $1.32 when one-time factors were excluded. The automaker’s EBIT-adjusted net rose to $3.2 billion for the latest quarter.

The surge in earnings came despite a number of headwinds. Those included higher materials costs. In particular, GM pointed to rising steel and aluminum prices that have resulted from the tariffs enacted by President Donald Trump on imports. Rival Ford last week said it expects the tariffs to add $1 billion in costs this year.

GM also is facing challenges related to the administration’s tit-for-ta trade war with China. New import tariffs on Chinese-made vehicles have hit the popular Buick Envision and are expected to have a significant impact on sales of the SUV going forward. Exports of American-made vehicles will also be hit by China’s decision to hike duties from 25% to 40%, though GM is not one of the top exporters to that market, largely relying on its Chinese plants to supply local dealers.

Barra noted the company is closely monitoring Chinese stimulus efforts, such a 50% auto tax cut.

“Obviously that would be a very good measure from an industry perspective,” she said. GM reiterated it’s going to be facing a $1 billion year-over-year commodity headwind in 2019 over 2018, “based on spot prices that existed at the time of second-quarter call.”

“Our disciplined approach to the U.S. market, combined with strength in China and further growth of GM Financial, drove a very strong quarter,” said GM CFO Dhivya Suryadevara. “We will continue to take actions to mitigate headwinds including foreign currency volatility and commodity costs.”

GM CEO Mary Barra's decision to shed money-losing Opel also helped power earnings.

(FCA earnings dinged by diesel emissions issue. Click Here for more.)

How things will fare in the Chinese market in the months ahead is far from certain, as sales there have been in negative territory for months, with little sign of improvement on the horizon.

The U.S. market has also been facing some downward pressure after declining in 2017 for the first time since the end of the Great Recession. But GM was able to offset falling demand for passenger car models like the Chevrolet Malibu and Cadillac CTS with new truck models, including the Chevy Traverse SUV and the bowtie brand’s 2019 Silverado makeover.

More than just boosting overall volume, Chevy and Sibling brand GMC have added new, higher-priced versions of their redesigned pickups. And models like the Silverado High Country are pushing up average transaction prices by a significant margin. And that helped push overall revenues for the quarter up to $35.79 billion almost a billion more than had been forecast.

Pricing, on the whole, went up, in part by GM’s focus on the retail market and a more disciplined approach to incentives. But rising prices, industry wide, have created some concerns.

“Affordability may be the canary in the coal mine,” warned Jeff Schuster, chief global vehicle forecaster at LMC Automotive. The data firm expects to see another modest drop in U.S. new vehicle sales this year and is watching a variety of factors that could lead to a sharper dip in 2019. That includes the possibility of another rate hike by the Federal Reserve in December.

For GM, the question is whether it will be forced to ramp up consumer-friendly incentives, including low-interest loans, if the American market begins to slow more rapidly. Key competitors have already been moving in that direction, including Japanese giant Toyota.

(Electric start-up Faraday Future effectively insolvent, says co-CEO. Click Here for that breaking story.)

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