Drive to Sell Pricier SUVs, Trucks Lift GM’s Profit – Wall Street Journal

Posted: Friday, April 22, 2016

The GM Buick Envision sports utility vehicle is displayed during the 2016 New York International Auto Show on March 24. Healthy sales of trucks and sport utilities in North America continued to drive GM’s profits.
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General Motors Co.
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’s first-quarter profit more than doubled compared with the same period a year ago, furthering the car maker’s argument that it can thrive even amid softer market conditions.

The Detroit-based auto maker said unit deliveries declined in the U.S. and growth cooled in China—its two biggest markets—but revenue overall climbed from selling pricier vehicles, such as the trucks and sport-utility vehicles. Its $1.95 billion profit was a first-quarter record, while operating margins and revenue exceeded analyst forecasts.

Thursday’s strong earnings was another building block for Chief Executive Mary Barra’s goal of making GM the most valued car company in the world. Steady margin growth and higher return on invested capital are essential, Ms. Barra argues, because it finances future technology and investments in emerging ventures, such as ride-hailing services and car sharing.

GM spent heavily in the quarter ended March 31, including on Lyft Inc., which competes with Uber Technologies Inc.’s ride-sharing service, and for the purchase of Cruise Automation Inc., a startup specializing in self-driving car development. The company also is buying back shares, repurchasing nearly $600 million thus far in 2016.

Investors aren’t buying deeply into Ms. Barra’s strategy. Shares traded up 1.5% in New York trading on Thursday to $32.66, still below the $33 stock price at its 2010 initial public offering, and below the $36.05 mark when Ms. Barra took over two years ago.

Chuck Stevens, GM’s finance chief, said the stock’s performance reflects investor anxiety about a downturn in the industry, and isn’t targeted at GM specifically. Ford Motor Co.
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, set to release quarterly earnings next week, also faces weak investor sentiment.

“There is a significant amount of negative sentiment from the investor perspective around the auto industry,” Mr. Stevens said. “We’ve performed reasonably well in a difficult environment.”

The largest U.S. auto maker by sales reported a profit of $1.95 billion, or $1.24 a share, up from $900 million, or 56 cents a share a year earlier when charges related to the company’s ignition-switch crisis and other factors weighed on the bottom line. Excluding such costs, GM said its per share operating profit was $1.26, beating analysts’ $1 estimate.

Revenue increased 4% to $37.3 billion, from $35.7 billion in the same period year ago, higher than Wall Street expectations. Last year’s first-quarter earnings were negatively affected by currency exchange and charges related to a safety crisis that first emerged in early 2014.

While North America and China are GM’s biggest markets, representing 75% of global volume, J.P. Morgan analyst Ryan Brinkman said GM’s stronger-than-expected earnings were driven by improvements in Europe and South America, “where execution was genuinely impressive.”

GM broke even in Europe, indicating it is on track to meet its goal of ending more than a decade of red ink in that region this year. In a call with analysts Ms. Barra said GM’s strong performance in Europe was driven by the successful launch of a new Opel Astra small car.

Losses in South America, which is rocked by economic volatility and a severe auto slump, were pared by $150 million amid job reductions and other cost-cutting measures. “We believe [the first quarter] augurs well for upside to full year consensus and guidance,” Mr. Brinkman wrote in a note. GM expects full-year earnings growth in 2016.

North American profit margin slipped to 8.7% of sales from 8.8% a year earlier due to a restructuring charge of $250 million taken to account for a recent labor agreement. Absent that expense, the region’s margins would have risen to 9.5%, a reflection of the auto maker’s drive to dial back on sales to rental car fleets, focusing instead on retail deliveries.

GM’s U.S. market share slipped below 17% during the quarter, one of only two of the six major auto makers to not book a sizable market share increase. Even so, the company earned $2.3 billion in the region, modestly higher than a year ago even as signs emerged suggesting demand is cooling after years of rapid growth.

Earnings at GM Financial, a lending unit heavily dependent on U.S. retail sales, reported flat income of $200 million. The auto maker had previously forecast 2016 as a breakout year for the finance arm in terms of profitability.

Equity income from various operations in China, where GM sales were essentially flat in the first quarter despite wider market growth, was $518 million. That is consistent with recent quarters.

Write to Gautham Nagesh at gautham.nagesh@wsj.com

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