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Strike Puts Big Dent in GM Profit -- WSJ

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10/30/2019 | 01:47am EST

By Mike Colias

General Motors Co. lowered its full-year profit outlook, saying the 40-day strike at its U.S. factories wiped out nearly all its free cash flow for the year and will cost the Detroit auto maker close to $3 billion in lost earnings.

The move came even as the car company posted third-quarter results that easily surpassed analysts' forecasts. GM shares rose 4.3% on Tuesday, a sign that investors are looking past the strike to the potential for strong earnings in 2020 underpinned by a refreshed line of pickup trucks, the company's biggest moneymakers. The share-price gains made up nearly all the ground the stock had lost since the strike began in mid-September.

Still, recovering from the prolonged work stoppage, which halted production at more than 30 U.S. factories, will add to GM's list of challenges in coming months as pressures build on the car business globally. GM executives said Tuesday that they expect the U.S. vehicle market to contract next year, and believe volatility will persist in GM's two other big markets: China and South America.

Last week, Ford Motor Co. cut its profit outlook for 2019, citing in part a tougher competitive environment in the U.S. Fiat Chrysler Automobiles NV reports its third-quarter numbers on Thursday.

GM also will have to dig deeper in search of savings to offset the higher costs of a richer four-year contract ratified by the United Auto Workers union last week. The deal, which increases wages and bonuses but also includes the closure of three U.S. plants, will add to costs but gives GM the flexibility to operate its U.S. factory network more efficiently, GM Chief Executive Mary Barra said.

GM's third-quarter pretax profit, adjusted for one-time items, fell 6%, to $3 billion. Lost production and other costs related to the UAW strike, which sent more than 46,000 U.S. factory workers at GM to the picket lines and halted production for the final two weeks of the quarter, dented profit by $1 billion.

The nationwide strike concluded Friday after GM's UAW-represented workers voted to back a new labor deal that locked in better wages, hefty bonuses and new investment in the auto maker's U.S. factories over the contract's four-year term.

The company's pretax adjusted earnings per share for the third quarter were $1.72, versus the $1.31 average estimate of Wall Street analysts. Net income fell 8%, to $2.3 billion. Revenue slipped 1% to $35.5 billion.

The largest U.S. auto maker by sales now expects pretax adjusted earnings per share of $4.50 to $4.80, down from an earlier forecast of $6.50 to $7 for full-year 2019. Free cash flow is expected to be less than $1 billion, down from a previous estimate of $4.5 billion to $6 billion.

GM said the strike's impact prompted the revised forecasts, but the company otherwise left its guidance unchanged.

The longest nationwide strike at GM in nearly 50 years derailed the company's plans for a big second half of 2019. Executives had assured analysts the accelerated rollout of redesigned pickup-truck models would boost earnings in the third and fourth quarters, after profit slipped in the first half of the year.

GM finance chief Dhivya Suryadevara said the company lost output of about 300,000 vehicles from the strike, and will try to make up some production in the coming months.

She said GM's ability to increase factory output of pickup trucks will be limited because its three North American truck factories already have been running full tilt.

Ms. Suryadevara said the new UAW contract adds incremental costs but should allow GM to more effectively operate its U.S. factory operations and preserves GM's ability to manage any future downturn in U.S. auto sales.

She declined to quantify the incremental costs, but Barclays estimated the new agreement could increase the company's hourly-workforce tab by $100 million in the first year, rising to $350 million in the final year of the contract.

"We're retaining flexibility as it relates to adjusting the workforce up or down based on industry [sales] levels," Ms. Suryadevara told reporters.

In addition to higher wages and bonuses, the four-year contract also accelerates the timetable it takes for new hires to reach top pay and preserves employees' out-of-pocket health-care costs at a relatively low level.

The union also agreed to allow GM to close three U.S. factories, including a large assembly plant in Lordstown, Ohio. Reducing its factory-floor space should help GM boost manufacturing efficiency and lower operating costs, Ms. Suryadevara said.

GM said it should still be able to achieve most of the cost savings it had pegged through a broad U.S. restructuring, which included the plant closures, along with layoffs of salaried workers.

The company expects the moves to result in cost savings next year of $4 billion to $4.5 billion, compared with a previous forecast of $4.5 billion. It attributed the lower range to the decision to keep open a Detroit factory that had been slated for closure, where GM now plans to make electric trucks.

Despite the hit from the strike, GM managed to boost its pretax profit margin in North America -- the auto maker's most profitable region -- to 10.8%, from 10.2% a year earlier. GM cited strong pickup-truck sales and cost cuts, offset by the strike and higher warranty costs.

Ford last week cut its full-year profit outlook, citing in part a tougher competitive environment in the U.S. that forced it to spend more on consumer discounts.

Ms. Suryadevara said GM's spending on discounts -- which can erode profit -- has remained disciplined, and strong pricing on the new trucks propelled earnings.

Results from China continued to weaken amid a broad downturn in the car market there. GM's third-quarter income from China fell 42% to $282 million.

Write to Mike Colias at Mike.Colias@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BARCLAYS PLC 6.18% 182.48 Delayed Quote.21.23%
FIAT CHRYSLER AUTOMOBILES 1.00% 13.326 End-of-day quote.4.04%
FORD MOTOR COMPANY -0.97% 9.23 Delayed Quote.20.65%
GENERAL MOTORS COMPANY -1.25% 35.65 Delayed Quote.7.92%
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Financials (USD)
Sales 2019 137 B
EBIT 2019 8 580 M
Net income 2019 6 281 M
Finance 2019 4 076 M
Yield 2019 4,35%
P/E ratio 2019 8,09x
P/E ratio 2020 5,75x
EV / Sales2019 0,34x
EV / Sales2020 0,29x
Capitalization 50 936 M
Duration : Period :
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Technical analysis trends GENERAL MOTORS COMPANY
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 22
Average target price 46,95  $
Last Close Price 35,65  $
Spread / Highest target 90,7%
Spread / Average Target 31,7%
Spread / Lowest Target -4,63%
EPS Revisions
Mary Teresa Barra Chairman & Chief Executive Officer
Mark L. Reuss President
Dhivya Suryadevara Chief Financial Officer & Executive Vice President
Randall D. Mott Chief Information Officer & Senior Vice President
Patricia Fiorello Russo Independent Director
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