Barra’s big­gest sur­prise yet: Mak­ing GM’s profit slow­down-proof

Gulf Times Business - - BUSINESS -

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 US 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.

While other car­mak­ers say a com­bi­na­tion of slump­ing sales, costlier clean-air rules and met­als tar­iffs are hurt­ing prof­its, Barra’s GM keeps find­ing ways to fat­ten the bot­tom line.

The au­tomaker has beaten guid­ance and sur­prised in­vestors for sev­eral years.

“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 em­pha­sis­ing more ex­pen­sive mod­els.

Sell­ing its Ger­man unit Opel elim­i­nated an oper­a­tion that his­tor­i­cally lost about a $1bn 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.

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% to $37.97 as of 2:45pm 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% plunge.

This isn’t the first time GM per­formed be­yond ex­pec­ta­tions:

GM sur­prised an­a­lysts in 2015, when it rode mo­men­tum in the US 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 US and a small profit in Europe, which had been a peren­nial money loser.

In the third quar­ter last year, GM shares jumped al­most 9% when ad­justed profit rose de­spite lower sales; in­vestors had ex­pected a de­cline.

The com­pany saw stronger de­liver- ies in China and squeezed out higher prices on its US trucks. GM plans to in­crease earn­ings by cut­ting thou­sands of salaried work­ers and clos­ing five North Amer­i­can plants to save as much as $2.5bn 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 US prob­a­bly will be in the low 17mn ve­hi­cle range this year, com­pared with about 17.3mn in 2018.

De­liv­er­ies in China may be close to last year’s al­most 27mn.

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% 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 alu­minium, 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 US 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 US 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.

Barra: GM will earn about $1 a share more this year.

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