Will GM Clear a Sharply Lower Bar When It Reports Earnings Tuesday?

Cars and Drivers

Published: October 28, 2019 11:40 am

Last Updated: January 30, 2020 1:59 pm

Now that General Motors Co. (NYSE: GM) and the United Auto Workers have settled their six-week-long strike, the only thing left for investors to do is to try to figure out what the settlement means going forward.

The impact on the company’s third-quarter is probably not going to be as bad as analysts have predicted. Three months ago, analysts were looking for earnings per share (EPS) in the third quarter of $1.92, compared to a current estimate of $1.31. By one estimate, the strike will have cost GM about $2 billion in lost revenue, with about one-third hitting the third quarter and two-thirds hitting the current quarter. The strike began on September 15 and ended last Friday, October 24.

Compounding the pressure on GM and other automakers are lower volume sales and higher incentives to buyers. According to TrueCar’s analytics subsidiary, ALG, new car sales in October are expected to decline by 4.7% year over year in October to 1.34 million units and a seasonally adjusted annual rate of 16.6 million units.

ALG forecasts GM’s October sales to drop 11.4% year over year largely due to inventory availability. The company entered the strike with inventory valued at about $11.5 billion, but popular sport utility vehicles and pickups could have become scarcer as the strike dragged on. Again, the impact in September and the third quarter may have been negligible.

Buyer incentive payments are also expected to rise month over month in October. ALG sees an industrywide increase of 4.7%, with GM popping 10.7% to $4,683, up from $4,229 in October 2018. The good news for the industry is that October incentive spending is forecast to be 5.1% lower than September spending.

GM is also struggling with lower sales in China, the company’s largest market by volume. Earnings from China could drop by as much as half year over year in 2019, according to Barron’s.

The company had previously guided full-year EPS at $6.50 to $7.00, but the current consensus calls for $5.62. GM’s adjusted free cash flow guidance of $4.5 billion to $6.0 billion also likely will be reduced.

While the strike was costly for GM and its shareholders, the information investors should be listening for is how quickly the company will be back at full production, what does it plan to do about falling sales in China and will it be able to keep raising prices on the SUVs and pickups that consumers seem to have an unending appetite for. Then there are GM’s substantial investments in electric vehicles and self-driving technology. What’s the company’s roadmap and timeline for those, other than the promise to release 20-some new electrified vehicles by 2023.

Shares traded late Monday morning at $36.95, up about 0.6%, in a 52-week range of $31.46 to $41.90. The consensus 12-month price target is $47.42 and the dividend yield on the stock is 4.14%.

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