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GM bucks gloomy earnings forecast trend, shares jump

Stock MarketsJan 11, 2019 04:39PM ET
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© Reuters. General Motors Oshawa assembly workers and supporters protest GM's announcement to close its Oshawa assembly plant during a Unifor union rally across the Detroit River from GM's headquarters, in Windsor

By Nick Carey and Ankit Ajmera

(Reuters) - General Motors Co (N:GM) executives on Friday bucked gloomy forecasts for growth and sent the automaker's shares soaring, promising investors stronger 2019 earnings and outlining ambitious plans for its Cadillac brand to challenge Tesla Inc (O:TSLA) in the growing electric vehicle market.

GM said that despite forecasts of decline in U.S. and China passenger car sales, the company expects 2018 profit to exceed Wall Street expectations, and promised higher earnings per share in 2019. Chief Executive Mary Barra, in her presentation to investors on Friday, stood her ground on cost-cutting actions that have provoked threats of retribution from U.S. President Donald Trump and outrage from unions and elected officials in the affected states.

"Because of the actions we have been taking for several years, General Motors enters 2019 leaner, more agile and positioned to win," Barra told investors at the New York presentation.

The market cheered GM's forecast, sending the company's stock up nearly 8 percent.

"We're very much looking forward to the execution of what they've announced," said Tim Piechowski, portfolio manager with ACR Alpine Capital Research, which owns GM shares. Piechowski said GM's core business, its stake in ride services company Lyft and its Cruise self-driving car unit are together worth more than the company's recent share price indicates.

Barra also said proposals from Ohio officials that GM sell its Lordstown, Ohio, small car factory to Tesla are "moot" because Tesla is "not interested in our GM workforce represented by the UAW," the United Auto Workers union.

As Barra spoke with investors in New York, hundreds of GM workers demonstrated in Windsor, Ontario, across the Detroit River from GM headquarters, protesting the company's plan to shut its Oshawa, Ontario, vehicle assembly plant. The UAW is suing GM in connection with U.S. plant shutdown plans, and on Friday called on GM to build its new electric vehicles in the United States.

GM's bullish outlook coincided with new cost-slashing actions by rival Ford Motor Co (N:F), which on Thursday outlined plans to cut thousands of jobs in its European operations and kill an experiment in providing van rides. Ford executives are scheduled to meet with investors next week on the sidelines of the Detroit auto show.

Barra and her lieutenants have spent the last two years pushing a strategy to exit unprofitable markets in Europe and developing markets, restructuring money-losing operations in South Korea, and killing unprofitable car lines in North America. In November it put five North American factories, including four in the United States, on notice for closure, and cut almost 15,000 jobs.

"We are no longer investing in things that don’t make money," GM President Mark Reuss told investors on Friday. "The future is coming fast. We are doing everything we need to do as fast as we can."

ELECTRIFYING CADILLACS

That includes making the Cadillac brand "the tip of the corporate spear" on electrification, Reuss said. He outlined plans to launch a new generation of electric vehicles that would be "profitable ... and attainable."

The automaker said Cadillac will become GM's lead electric vehicle brand as the largest U.S. automaker gears up to introduce a new model under that luxury brand to challenge Tesla, a development first reported by Reuters on Thursday.

Tesla's market capitalization is higher than GM's, even though the electric carmaker has never posted a full-year profit.

GM is relying on profit from sales of large pickup trucks and sport utility vehicles in North America to fund its electrification push. The battle in that lucrative market is intensifying among the Detroit Three automakers as sales of small cars in the United States shrivel. Both GM and Fiat Chrysler Automobiles NV (MI:FCHA) (N:FCAU) have launched revamped pickup trucks in a bid to take more share in the U.S. auto industry's most profitable segment.

Still, GM Chief Financial Officer Dhivya Suryadevara emphasized to investors on Friday that the large pickup market is a three-company oligopoly protected by "competitive moats." Those include a 25 percent U.S. tariff on imported trucks that predates the Trump administration's trade actions.

GM's biggest market by vehicle sales volume is China, and the economic slowdown in the world's largest auto market has rattled investors across industries. Apple Inc (O:AAPL), for instance, last week took the rare step of cutting its quarterly sales forecast, blaming slowing iPhone sales in China.

GM's China president, Matt Tsien, told investors on Friday that industry-wide auto sales in that country should stay roughly flat in 2019 after the 2018 decline. GM is taking actions to cut costs, including increasing automation in its Chinese plants and pushing down purchasing costs, he said. Cost-cutting coupled with 20 new or redesigned vehicles that will launch in China this year will sustain the company's profit, he said.

"Overall, GM is in a good position to mitigate the headwinds" in China, Tsien said.

Kyle Martin, research analyst with Westwood management in Dallas, Texas, which owns GM shares, said GM's macroeconomic assumptions are "not conservative, for sure. For China to be flat, you're going to need some stimulus."

GM, with its Chinese partners, sells more vehicles in China than in the United States. The automaker builds locally most of the vehicles it sells in China.

BULLISH EARNINGS OUTLOOK

GM said it expects 2019 adjusted earnings per share in the range of $6.50 to $7.00, above the $5.86 expected by analysts according to IBES data from Refinitiv.

"Bottom line, we believe management just reset the bar higher for earnings and cash flow despite increased macro concerns among investors," Buckingham Research Group analyst Joseph Amaturo wrote in a client note.

The company said it expects adjusted automotive free cash flow in 2019 to come in between $4.5 billion and $6 billion.

Still, CEO Barra faces pressure to lift GM's share price, which has lagged broader market performance. The company has confronted challenges from activist shareholders twice during the past four years.

GM shares rose as much as 9.3 percent on Friday and were still up 7.8 percent at $37.45 in afternoon trading.

GM bucks gloomy earnings forecast trend, shares jump
 

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