Consumer Edge Research

GM Reminds Wall Street SUVs Still Worth Getting Excited For (1)

David Welch, Bloomberg
Oct 24, 2017

 General Motors Co. just reminded Wall Street that there are reasons to get excited about its stock besides the hype around its technology advances.

Americans still want their SUVs, and the largest U.S. automaker beat analysts’ profit estimates by boosting sales of those more lucrative models. While GM slashed North American production by more than a quarter, cost cuts kept margins at healthy levels. The shares climbed the most in three weeks and closed at a record.

The results pushed up a stock that, until the last two months, had stagnated as investors feared that peaking car sales and Silicon Valley’s foray into auto technology meant GM’s best days had passed. Instead, Chief Executive Officer Mary Barra has changed perceptions of the automaker’s position in electric and self-driving vehicles. The share surge has paid off for the likes of billionaire hedge fund manager David Einhorn, who pressured management to change GM’s stock structure earlier this year.

“The progress we’ve seen in the stock price, certainly we’re pleased,” GM Chief Financial Officer Chuck Stevens told reporters Tuesday. “It’s the strength of the core business. Secondly, we also have been out very actively talking about the assets, the capabilities and the approach we have been bringing to bear relative to autonomy and personal mobility.”

GM shares rose 3 percent to close at a record $46.48. The Detroit-based automaker’s stock has surged 33 percent this year, more than double the gain by the benchmark Standard & Poor’s 500 Index.

Cost Cuts

The largest U.S. automaker has cut annual costs by more than $5 billion since the beginning of 2014, which has helped keep profits up even as production and sales are down, Stevens said. The automaker reported adjusted earnings of $1.32 a share for the quarter ended last month, beating the $1.11 average analyst estimate.

Booming U.S. demand for sport utility vehicles also carried Fiat Chrysler Automobiles NV to better than expected earnings in the period. The Italian-American company’s U.S.-listed shares jumped as much as 7.5 percent.

While Fiat Chrysler has rallied thanks in part to merger speculation, investors have been interested in GM’s potential to develop its own ride-sharing business using self-driving cars. The company’s core business has also been resilient amid a weaker car market.

“At the moment, the force is strong with GM,” James Albertine, an analyst with Consumer Edge Research, wrote in a report to clients Tuesday. “Management is being prudent and using today’s strengths,” including trucks and sport utility vehicles, “to offset investments in restructuring and new technology.”

Although some analysts have speculated that GM will spin out some businesses, especially self-driving car and personal mobility units, Stevens downplayed the possibility for now, saying it makes sense to keep those businesses under one roof.

While Wall Street has been excited about GM’s future technology, the past quarter was one of retrenchment. Production cuts were the biggest factor in revenue falling 14 percent to $33.6 billion.

Curbing Cars

The automaker has been reducing output at passenger car plants as sales slow, including cutting a shift at its compact car plant in Lordstown, Ohio, and one at its sedan plant in Detroit. Even an SUV plant in Tennessee will be cutting jobs next month to reduce inventory at dealers.

The automaker also lost production at an SUV plant in Ontario, where workers building the hot-selling Chevrolet Equinox went on a monthlong strike that ended last week. GM’s factory in Fort Wayne, Indiana, which makes its high-margin full-size pickup trucks, and its Arlington, Texas, full-size SUV plant also shut down temporarily in the third quarter to get ready for new versions of the vehicles they build, a company spokesman said.

Beyond production hits, GM also took $5.4 billion in charges related to the sale of its European units Opel and Vauxhall to France’s Peugeot SA. The charges included about $4.3 billion in unrealized deferred tax assets and another $1.5 billion in pension-related costs. GM has proceeds coming in from the deal that offset some of those losses.

GM also continues to spend about $150 million a quarter to help its San Francisco-based Cruise Automation unit develop self-driving vehicle technology, a spokesman said. The automaker recently said its self-driving Chevy Bolt electric car is ready for mass production and that it will have 20 new electric vehicles by 2023.

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