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February 5, 2020 1:45 PM, EST

GM to Rely on Cash-Cow SUVs to Overcome Auto Market Weaknesses

GM vehicles before being painted at their complex in Flint, Mich., in February 2019.GMC Silverados and Sierras before being painted at a complex in Flint, Mich., in February 2019. (Jeff Kowalsky/Bloomberg News)

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General Motors Co. predicted robust sales of new trucks and big SUV models will help it avert the kind of earnings decline this year that its rivals are bracing for.

Adjusted earnings per share will be roughly level with 2019 when excluding the effects of last year’s 40-day labor strike and other factors, GM said in a statement Feb. 5. Its projected range of $5.75 to $6.25 a share compared with analysts’ average estimate for $6.24.

GM also eked out a small surprise profit in the last quarter, and its shares rose as much as 3.1% before paring gains. Analysts at JPMorgan Chase & Co. and RBC Capital Markets both called GM’s outlook for this year “good enough.”

While rival Ford Motor Co. has struggled to keep profit stable, GM has managed to offset weaker sales by selling more expensive models. That’s true in China, where Cadillac is growing and mainstream brands are in decline, and in the U.S., where GM is relying on a full year of its new pickups and the third-quarter debut of cash-cow Chevrolet Tahoe and Cadillac Escalade sport utility vehicles.

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“We expect another strong year in 2020,” GM Chief Financial Officer Dhivya Suryadevara said in the statement. “Our relentless focus on improving our operating performance will enable us to generate strong cash flow through the cycle and invest in our future.”

GM was up less than 0.4% to $34.50 as of 12:30 p.m. in New York. CEO Mary Barra has struggled to boost the stock despite years of strong execution, leading Morgan Stanley analysts to issue a report ahead of investor presentations on Feb. 5 with the title: “What more can they do?”

The United Auto Workers walkout that ended in October cost GM about $3.6 billion of lost profit last year. Adjusted earnings for the fourth quarter, which treated costs from the strike and other charges as one-time items, were 5 cents a share, beating the average analyst estimate for zero profit. For the year, the company made $4.82 a share, which beat the average estimate of $4.77.

GM is expecting to weather 2020 conditions better than Ford, whose shares fell as much as 10% Feb. 5 in their biggest intraday decline since July 2016. The No. 2 U.S. automaker by global vehicle sales on Feb. 4 forecast 2020 earnings that fell short of expectations. It’s been hurt by heavy spending to bring new models to market and investment in electric vehicles, and sales have slumped in key markets.

China Outlook

GM’s profit in China tumbled as car demand there continued to contract, especially in the smaller cities where GM relies on its Wuling and Baojun brands. The company’s local product lineup was showing its age well before the coronavirus cast further doubt on the industry recovering anytime soon.

GM made $239 million in the fourth quarter, compared with $307 million in the year-ago period. Earnings for the year fell by almost half to $1.1 billion.

In a conference call with reporters, Suryadevara said GM remains bullish about its position in China. The Buick brand, which generates much of the company’s sales, will launch new models this year.

“The brands have a lot of brand equity — that continues,” she said. “We have new vehicles coming with technologies that people want to see. Correcting some of the near-term challenges, our leadership position will continue.”

Morgan Stanley analyst Adam Jonas said earlier this week he is prepared for a situation where GM merely breaks even in China. But in the company’s investor presentation, GM China President Matt Tsien said he expects the automaker to remain profitable this year. Cadillac probably will set another local sales record, he said.

Strike, Cruise

The UAW’s strike hit GM hard, cutting $1.39 a share from fourth-quarter earnings and $1.89 from full-year results. The walkout reduced automotive adjusted free cash flow by $5.4 billion in 2019 to $1.1 billion.

For 2020, GM said the auto business should generate between $6 billion and $7.5 billion in cash.

GM continues to spend a lot on Cruise, the self-driving vehicle unit in which it owns a majority stake.

Cruise cost GM $1 billion in 2019 and has been noncommittal about how soon it will launch a driverless ride-sharing service that would start bringing in revenue. The company initially planned to start deploying robotaxis last year, but postponed the debut of the service indefinitely.

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