Truck, SUV Sales Power GM's Profit -- 2nd Update

By Mike Colias Features Dow Jones Newswires

Brawny trucks like the Chevrolet Silverado pickup and Cadillac Escalade SUV continue to rumble over the trouble spots creeping into General Motors Co.'s path.

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GM notched record profit and revenue in the first quarter, despite signs of weaker pricing and consumer demand in the world's two largest car markets -- the U.S. and China -- and widening losses in Europe, South America and parts of Asia.

The results underscore how reliant GM's bottom line remains on pickup trucks and SUVs, despite efforts in recent years to improve its car offerings to better compete with Toyota Motor Corp. and other Asian producers. Large pickups and SUVs are thought to generate the majority of GM's profits even though they account for roughly 11% of global sales.

GM said the 34% jump in first quarter net income to $2.6 billion was helped in part, by the continued pricing power of its truck lineup.

The nation's largest auto maker by sales posted first-quarter operating profit of $1.70 per share, breezing past Wall Street expectations of $1.47 per share. It also stood by its forecast of $6 to $6.50 EPS for the year.

Ford Motor Co. and Fiat-Chrysler Automobiles this week also posted earnings that topped analysts' estimates, bolstered largely by pickup-truck and SUV sales.

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"The pickup market remains very robust and strong," GM finance chief Chuck Stevens told reporters Friday, noting that the company's four North American truck factories are "running full-on" to meet demand.

GM continues to generate the bulk of its profits in North America, where it continues to command high prices for pickup trucks and big SUVs, even as pricing erodes on passenger cars and smaller SUVs industrywide. GM's average prices in the U.S. slipped overall compared with a year ago, but the average price of a GM pickup truck edged up nearly $700, to $42,650, a spokesman said.

The stout truck business is helping to offset growing signs of trouble in other areas of GM's business.

In the U.S., softening demand for passenger cars industrywide forced GM in recent months to cut production, laying off more than 4,000 workers.

Shrinking car demand is leading to trouble for auto makers' finance arms, too. GM estimates used-car prices nationally sank 7% in the first quarter, the steepest drop in recent years. Weaker used car prices can siphon away sales of new cars as consumers choose cheaper options, while falling resale values make it more expensive for car companies to lease vehicles.

Meanwhile, GM's sales in China fell 5% and pricing was squeezed amid slowing demand after the government reduced a tax incentive for smaller vehicles. GM countered by selling a higher mix of pricier vehicles, including Cadillacs and Buicks, and maintained flat equity income from its Chinese joint ventures at around $500 million.

GM continues to lose money in Europe, a region it will exit later this year upon the expected closure of the sale of its Opel division to French car maker Peugeot. GM's first-quarter loss in Europe was $206 million, versus just $6 million a year earlier, amid exchange-rate pressure stemming from Brexit.

Losses in South America widened to $115 million, from $67 million, as conditions in Brazil remain difficult despite GM's expectations for improved performance in the region this year.

Despite beating profit forecasts, GM shares were flat Friday, as they have been for much of the auto industry's unprecedented seven-year run of rising sales. The stock has struggled to stay above the $33 IPO price from 2010 despite two straight years of record profits, reinstating a common-stock dividend and billions in stock buybacks.

The lethargic stock price has drawn interest from activist shareholders including Greenlight Capital's David Einhorn, who has nominated a slate of three directors and is pushing a plan to divide GM's shares into two classes, separating its dividend from its operations. GM is urging shareholders to vote down the proposal at its annual meeting in June.

Analysts point to concerns about a sales peak and whether GM can sustain strong profitability if U.S. auto sales turn sharply lower. Industry sales are slipping -- they're projected to decline for the fourth straight month in April -- though few analysts expect a steep decline in coming years.

In a research note Friday, Barclays analyst Brian Johnson said GM might have to cut U.S. production later this year, and could be forced to spend more on incentives if industry demand slows further.

"Despite the strong beat," he wrote, "we question whether this result will fundamentally alter the market view on GM."

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

(END) Dow Jones Newswires

April 28, 2017 16:14 ET (20:14 GMT)