GM Runs Full Bore On SUV, Truck Demand -- WSJ

By Gautham Nagesh 

General Motors Co. posted its best financial quarter in the seven years since emerging from bankruptcy even as Brexit concerns have the Detroit auto giant raising a caution flag for the second half of 2016.

Results for the quarter benefited from a continued shift in the U.S. to high-margin trucks and sport-utility vehicles from passenger cars, steady sales increases in China and improved conditions in Western Europe.

GM's second-quarter operating profit far exceeded analysts' expectations. Overall profit for the period ended June 30 more than doubled to $2.9 billion on revenue up 11% to $42.4 billion, both quarterly postbankruptcy records.

GM also eked out a $137 million gain in Europe, its first in the region since 2011. But Chief Financial Officer Chuck Stevens signaled concern about a potential hit to earnings later this year because of the U.K.'s decision to exit the European Union. Citing a weakening British pound and softening of U.K demand, the company estimates $400 million in potential second-half impact because of Brexit, possibly knocking GM off its goal of reporting black ink in Europe on an annual basis for the first time since 1998.

"The Brexit vote has created a potentially significant headwind," Mr. Stevens said when discussing earnings on Thursday. But he reiterated the auto maker still aims to meet its profit projection. "This is a speed bump along the way that we're going to deal with." Cost cuts and pricing changes could soften Brexit's blow, he said.

Missing the European profit target would be a rare misstep for Chief Executive Mary Barra, who took the helm in 2014 on the eve of the disclosure of a major vehicle-safety crisis. With that ignition-switch episode largely in the rearview mirror, Ms. Barra has consistently asked investors to judge her by results and not by lofty projections.

GM's global operating margin of 9.3% last quarter indicates the company is on track to meet its longer-term profit goals. GM shares were up 1.7% at $32.03 at 4 p.m. in New York trading on Thursday.

Second-quarter results benefited from $3.6 billion in operating profit in North America on GM's sharp increase in high-margin truck and sport-utility production, a move aimed at stocking dealer lots ahead of the summer selling season. GM books revenue and profit at the point of production, a strategy that allowed the company to offset concerns about the sizable amount of market share it lost in the period compared with the same quarter in 2015.

GM's North American earnings represented 90% of global operating profit for the quarter, and the region's 12.1% operating margin was a key factor driving global results and a 25-cent-a-share increase in its 2016 earnings estimate. Continued growth in China -- GM's largest sales market -- also boosted optimism.

Fearing a peak in U.S. light-vehicle demand, however, Ms. Barra has aggressively retooled for the future. The early months of 2016 included significant investment announcements, including a $500 million stake in ride-sharing firm Lyft Inc. Ms. Barra declined to say whether GM will participate in additional funding rounds, but said the "alliance" has met expectations this far.

The company on Thursday said in a regulatory filing its deal to purchase Silicon Valley autonomous-car developer, Cruise Automation Inc., was valued at nearly $700 million when it closed in May. That sum includes certain retention bonuses for certain Cruise employees, but doesn't reflect other undisclosed performance awards tied to technology and commercialization milestones.

Speaking to analysts, Ms. Barra said GM was drawn to Cruise by its expertise in machine learning and artificial intelligence, two areas considered crucial to the development of fully autonomous vehicles. GM engineers, including those acquired in the Cruise deal, are testing autonomous Chevrolet Bolt electric cars in San Francisco.

Edward Jones senior equity analyst Jeff Windau said GM's management team is executing "very well" amid favorable market conditions. Low fuel prices have ratcheted up demand for the heavier and pricier light trucks that represent Detroit's sweet spot, and low industry inventories have limited the need for incentives.

He said softening demand in the U.S. could impact GM's ability to maintain its discipline on pricing. Weakness in South America and uncertainty in Europe -- fueled partially by Brexit -- presents risks. GM posted an operating loss of $121 million in South America last quarter, where economic turmoil has hurt its business by economic woes in Venezuela and Ecuador and the impact of the strong U.S. dollar.

GM also said in a regulatory filing on Thursday that it could be forced to eventually recall an additional 4.3 million vehicles equipped with Takata Corp. air bags, leading to costs totaling $550 million. The components are part of a wider industry recall of tens of millions of Takata air bags that run the risk of rupturing and spraying shrapnel into a vehicle's cabin.

--Mike Spector and John D. Stoll contributed to this article

Write to Gautham Nagesh at [e-mail]

(END) Dow Jones Newswires

July 22, 2016 02:48 ET (06:48 GMT)

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