GM Faces Big Stock Drop After Reduction of Profit Outlook

Investors had good reason to be nervous about General Motors’ (GM) outlook when the company reported its earnings on Tuesday. The nation’s largest automaker saw its shares fall 6% to $31.11 on the day,…

GM Faces Big Stock Drop After Reduction of Profit Outlook

Investors had good reason to be nervous about General Motors’ (GM) outlook when the company reported its earnings on Tuesday.

The nation’s largest automaker saw its shares fall 6% to $31.11 on the day, after cutting its full-year profit forecast. On top of that, the company posted its largest quarterly loss in more than a decade, $3.9 billion, as higher steel and aluminum costs significantly pulled the company’s quarterly bottom line lower.

“The cost side of the equation was always the higher cost elements I was most concerned about going into the quarter,” Citi analyst Itay Michaeli said. “The reduction in guidance is a function of the growth. They expected the full-year rate to be in the mid-20s but now it looks like we’re going to be in the mid-20s. The profit growth trajectory is coming slower than they had forecasted.”

GM plans to lift production for full-sized trucks and SUVs by 6.7% in 2019 versus a year ago, and as a result of strong sales, the company said costs to build those vehicles will rise around 9% to $46,000 for their average cost. GM’s new-model S10 Silverado and Sierra, as well as pickups like the F-150 Silverado, are key business drivers for the company. GM launched those trucks late last year and has generated significant sales.

Despite record automotive sales in the U.S. in 2017, the company said profit will come in at the lower end of its previously guided range, largely on higher steel and aluminum costs that began with last summer’s tariffs and the ongoing supply issues. GM also plans to cut less profitable vehicles and move production closer to where it sells the vehicles, the company said.

“In order to fully compensate our customers for the impact of tariffs, we are taking measures to lower material cost and reduce the mix of light trucks and SUVs,” GM Chief Financial Officer Chuck Stevens said. “These changes are taking time and require significant investments in the plants, but we expect to see the benefit in 2019 and 2020.”

The company said it plans to lift production of the most profitable versions of the Chevrolet Equinox crossover to accelerate annual sales growth, as well as its Chevrolet Terrain and Silverado pickup trucks, which will boost profitability and margins.

“GM focused on core business solutions as they missed the mark in capital allocation, deleveraging and ramping new product,” Jefferies analyst Peter Nesvold said. “Q3 lowered market expectations on softer volume and sharp rise in steel costs. It is encouraging that GM and others are responding with actions around supply constraints. But margins were still down year-over-year, miss the miss in volume and margins were still down year-over-year.”

Lazard analyst Himanshu Patel said the company warned on costs earlier this year, noting that “the majority of the product-related headwinds relate to an expected step-up in commodities costs in 2019.”

GM said it expects the tariffs imposed by the Trump administration will increase raw material costs for the second half of 2019 by about $2 billion.

“The largest segment of headwinds is steel and aluminum which is being impacted by the recent tariffs and to a lesser extent certain other metals,” GM said. “The uncertainty around trade agreements creates a risk to our costs and demand outlook as we look forward.”

Some analysts suggested that GM should look more at cost cutting as a solution to its issues and not fret about delayed sales and order cancellations.

“While GM faces incremental headwinds from tariffs and a number of legacy issues, we believe investors are materially underestimating the strength of GM’s new portfolio,” Morgan Stanley analyst Adam Jonas said. “GM needs to demonstrate that it can effectively manage cost increases and capital structure exposure, rather than shrinking as a means to expedite a potential exit.”

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