GM earnings beat lifts shares but U.S. strike weighs on outlook

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By Nick Carey and Ben Klayman

DETROIT (Reuters) – General Motors Co (NYSE:) on Tuesday slashed its earnings forecast for 2019, saying that a 40-day U.S. labor strike by the United Auto Workers union that brought virtually all of its North American operations to a standstill would cost it around $3 billion in profits this year.

But GM shares rose 4.6% in early trading on the back of a better-than-expected quarterly net profit because of robust U.S. sales of high-margin pickup trucks and SUVs. Wall Street analysts have viewed the strike costs as a tradeoff for three U.S. plant closures agreed to with the union that will boost GM’s profitability.

“The underlying business was strong this quarter,” Chief Financial Officer Dhivya Suryadevara told reporters at GM’s headquarters, describing the strike as a “one-time impact.”

Last Friday, the 48,000 United Auto Workers union members at GM ratified a new four-year labor deal with the Detroit company. The 40-day strike cost GM more than $2 billion according to analysts.

The Detroit-based automaker reported a 6% increase in third-quarter U.S. sales, led by its highly-profitable full-size pickup trucks, SUVs and crossovers that helped it race to a strong profit margin of almost 11% in North America. It’s that underlying business that has investors excited.

“Frankly, I’m as emboldened as ever,” said Chris Susanin, co-portfolio manager at Levin Easterly Partners, which owned more than 4 million GM shares at the end of June. “I don’t see why this stock isn’t north of $100 (a share) in a couple years.”

Virtually all of the pre-tax profits came from its North American business and its captive finance arm.

In China, where GM reported a 17.5% drop in third-quarter sales, the company’s equity income fell 40% to $300 million.

It was the fifth straight quarterly sales decline for GM in China, the world’s largest auto market, where the industry is expecting a second consecutive annual sales drop.

The China Association of Automobile Manufacturers expects a 5% decline for industry sales in 2019, then contracting or growing slowly over the next three years.

“It (China) remains volatile,” GM CFO Suryadevara said.

Last week, GM’s smaller U.S. rival, Ford Motor (NYSE:) Co, cut its forecast for operating profit for the year after a disappointing quarter hurt by higher warranty costs, bigger discounts and weaker-than-expected performance in China.

GM said the strike by the UAW had cost it $1 billion on pre-tax profits in the quarter, or 52 cents per share. CFO Suryadevara said the automaker lost around 300,000 units of vehicle production during the strike.

The union wrung higher pay and other benefits from GM as part of the deal to end the strike.

Under the deal, GM will invest $9 billion in the United States, including $7.7 billion directly in its plants, with the rest going to joint ventures.

The No. 1 U.S. automaker said the full-year impact of the strike would be around $2 per share, or around $3 billion.

GM said it now expected full-year adjusted earnings per share between $4.50 to $4.80, down from its previous forecast of $6.50 to $7 per share.

The company said it now expected full-year adjusted automotive free cash flow in a range from zero to $1 billion, down from its previous forecast of $4.5 billion to $6 billion. GM’s adjusted automotive free cash flow stood at $2.4 billion at the end of the third quarter.

GM also cut its projected 2019 capital expenditures to around $7.5 billion from its previous outlook of $8 billion to $9 billion.

The automaker posted third-quarter net income of $2.3 billion, or $1.60 a share, down from $2.5 billion, or $1.75 a share, a year earlier. Excluding one-time items, GM earned $1.72 a share. Analysts had expected $1.31, on average, according to IBES data from Refinitiv.

Revenue fell slightly to $35.47 billion from $35.79 billion, above analysts’ estimates of $33.82 billion.