GM, Fiat Chrysler Shares Climb As Investors Focus on Companies' Futures

By Mike Colias and Chester Dawson Features Dow Jones Newswires

Shares in General Motors Co. and Fiat Chrysler Automobiles NV rallied Tuesday even as conditions in the core U.S. auto industry soften, the latest sign Wall Street is willing to give Detroit credit for using a string of record profits to reduce debt and sharpen focus on future technology.

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The two auto makers reported dramatically different bottom-line performances in the third-quarter, with GM posting a nearly $3 billion net loss related to the sale of its money-losing European business and production declines in North America. Fiat Chrysler earned $1 billion over the same period on a net basis, up 50% from the third quarter in 2016.

Investor attention, however, has been trained on the companies' futures.

GM has been pouring money into moonshot technologies, including autonomous vehicles, while retreating from poor-performing markets. The auto maker's revenue fell sharply to $33.6 billion during the quarter, a testament to the company's exit from Europe, India and Russia, and pullback from low-margin businesses in the U.S., including passenger cars and sales to rental companies.

Fiat Chrysler, meanwhile, has been chipping away at debt amid continued interest in finding a partner to merge with. Chief Executive Sergio Marchionne has been late to self-driving car development and electric vehicles, but argues Fiat Chrysler needs to find more scale through a merger before it can effectively compete in those areas.

Shares of GM traded up 2.49% at $46.27 Tuesday morning near their postbankruptcy high point, while Fiat Chrysler traded up 3.96% at $17.22. The continued momentum represents a shot in the arm for at least two of the domestic auto makers that spent several years with market valuations stuck in neutral despite record sales in the U.S. market.

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Ford Motor Co. reports third-quarter earnings Thursday. Shares of the No.2 U.S. auto maker, however, haven't budged much even after the company changed CEOs in May.

Delphi Automotive PLC said Tuesday that it has agreed to buy a self-driving startup for $450 million, boosting the automotive supplier's drive to bring autonomous vehicles to market by the end of the decade.

Delphi's purchase of nuTonomy Inc., a Boston-based software firm focused on automated driving technology firm, positions the combined company as one of the leading players globally in a rapidly developing future market for partially or fully self-driving cars. It comes as part of Delphi's plan to transition from a hardware-dependent component maker to a software-focused service supplier.

GM's bottom line included a $2.3 billion expense from a tax allowance that went away following the August sale of GM's Opel European unit to French car maker Peugeot. GM said net profit was $115 million on continuing operations, minus the year-ago results from the business in Europe.

Operating profit from continuing operations dropped 31% to $2.5 billion, hurt by production cuts in North America. Several factories were idled during the quarter to prepare for new-model launches. GM also has moved aggressively to cut passenger-car production in the face of weak demand, and it continues to trim less-profitable car sales to rental agencies.

The production pullback is a hangover effect from the first half of the year, when GM overbuilt at several factories in anticipation of plant downtime in the third and fourth quarters. But auto makers also have suffered from a severe downturn in demand for passenger cars, which forced GM to cut about 3,000 workers across several U.S. car plants this year.

GM's third-quarter production in North America fell 25%, according to WardsAuto.com, contributing to an 8.3% decline in operating profit. Finance Chief Chuck Stevens said the result "demonstrates resilience" in the North American business given the lower output, and credited GM's recent efforts to cut costs.

GM shares have rallied over the last two months amid analyst focus on advancements in the auto maker's driverless-car program and other advanced technology. Barclays analyst Brian Johnson said in a research note Monday that a better-than-expected quarter from GM even amid the production cuts could help sustain investor momentum.

"We think this quarter could provide yet another data point that the investor perception of GM is shifting," Mr. Johnson said.

Fiat Chrysler shipments in North America -- its largest region -- fell 6% to 592,000, and overall revenue fell 2% to $31 billion.

Fiat Chrysler reported lower-than-expected net debt in the most recent quarter, Evercore ISI said Tuesday, helping lower the auto maker's financing expenses and lifted adjusted operating profit to a record.

Allison Prang contributed to this article

Write to Mike Colias at Mike.Colias@wsj.com and Chester Dawson at chester.dawson@wsj.com

Wall Street is finally rewarding Detroit's old guard auto companies for the direction they are taking, leading them to garner strong stock gains even as the car market is softening.

The industry developments Tuesday highlight a strategy shift that is well under way in the Motor City. Caught off guard by rapid developments and sizable investments in driverless cars and other innovative transportation ideas coming from Silicon Valley tech giants, including Alphabet Inc., Tesla Inc. and Uber Technologies Inc., domestic auto companies have fought back by slimming down or dumping old lines of business and focusing on efforts to reshape the way people get from Point A to B.

On Tuesday, General Motors Co. recorded one of its worst quarterly net-incomes since filing for bankruptcy in 2009, spilling nearly $3 billion in red ink during the July through September period. GM's performance is primarily due to decisions to dump its unprofitable European operations and pare back on low-margin businesses, such as passenger-car production and sales to rental companies. A strong balance sheet, allows the company to plow resources into autonomous driving and electric vehicles.

Delphi Automotive PLC, meanwhile, purchased a popular driverless-car developer, the latest attempt to supercharge the American auto-supply sector's role in reinventing personal transportation.

Ahead of Ford Motor Co.'s third-quarter results Thursday. Chief Executive Jim Hackett unveiled a management shake-up after five months at the helm. Mr. Hackett has said he wants to speed decision making and "attack" costs at Ford, targeting $14 billion in annual savings within five years, aimed at streamlining the core business so it can steer more investment toward driverless cars and electric vehicles.

Fiat Chrysler Automobiles NV, meanwhile, reported a 50% increase in net earnings, but sales and North American profit growth flatlined over the summer. Still, the company maintained an ambitious outlook and higher-than-expected cash inflows helped chip away a debt load that is seen as a hurdle to the Italian-American auto maker's pursuit of a merger partner.

Citi analyst Itay Michaeli said GM's ability to post an 8.3% margin in North America amid a 26% production cut and "downturn-like conditions," demonstrates the type of resiliency that cyclical domestic car companies once lacked.

Revenue took hit, falling 12% to $33.6 billion. The shrinking top line reflects GM Chief Executive Mary Barra's strategy to pursue profits and game-changing tech over market share.

GM shares touched $46.76 Tuesday, with a $67.5 billion market capitalization representing the highest value since its 2010 initial public offering and an $11 billion lead over Tesla, which is under pressure to launch a mass-market electric car. GM Chief Financial Officer Chuck Stevens said he was "pleased" investors are rewarding progress on the core business and future technology bets.

Mr. Stevens says he believes investors are rewarding "actions we've been taking over the last number of years to build a stronger, more resilient core business."

Meanwhile, Fiat Chrysler has benefited by doubling down on production of popular SUVs and trucks. Chief Executive Sergio Marchionne says the company will remain disciplined once it climbs back to positive net cash.

"I don't want to chase rainbows," Mr. Marchionne told financial analysts on a conference call, saying memories of being starved of capital a decade ago after Chrysler emerged from bankruptcy are still fresh. "The scars that this last crisis caused I still have," he said.

Shares in Fiat Chrysler closed $17.45 Tuesday, a 5.45% increase, one of the highest points since the company's formation earlier in the decade.

Ford's market value, which is roughly 25% lower than GM, has barely budged during the short tenure of its new CEO. The shake-up on Tuesday led to the surprise departure of John Casesa, a former investment banker and star auto analyst who was charged with running strategy in 2015 under ex-CEO Mark Fields. The heads of marketing, quality and human resources all elected to leave the company as well.

Ford's board installed Mr. Hackett in May after ousting Mr. Fields amid questions about Ford's direction and culture. Earlier this month, Mr. Hackett briefed investors on broad plans to accelerate Ford's development of autonomous vehicles and electric cars, though his outline left some wanting more specifics.

Delphi's $450 million acquisition of Boston-based NuTonomy Inc. could help the Michigan-headquartered company bring autonomous vehicles to market by the turn of the decade. This is a boost for Detroit's car companies, which have deep ties with Delphi dating back to the days when it was a subsidiary of GM.

Delphi acquired other startups in recent years, including its 2015 purchase of Carnegie Mellon University spinoff Ottomatika Inc., another company that provides software for self-driving cars. This further changes Delphi's profile in the industry from a company that many analysts saw ripe for acquisition into a potential power player.

The deal for NuTonomy -- a spinoff of MIT that attracted attention with its public driverless-car tests in Singapore -- adds top robotic talent to Delphi's growing stable of acquisitions and partnerships as it looks to create an entire autonomous vehicle system that it can sell to auto makers. For NuTonomy, Delphi's scale provides leverage to hasten the industrialization of self-driving technology, allowing it to put its stamp on software installed in millions of future vehicles.

This is a win for the domestic auto-supply chain following the recent acquisition of Harman International Industries by Korea's Samsung Electronics, and the acquisition of Mobileye NV by Intel Corp. earlier this year. Harman and Mobileye are considered pioneers in the development of connected cars that can drive themselves. Delphi wants to join with auto makers on speeding up autonomous-car research and offer its own off-the-shelf solution for car companies that don't have deep pockets.

--Tim Higgins contributed to this article.

Write to Mike Colias at Mike.Colias@wsj.com and Chester Dawson at chester.dawson@wsj.com

(END) Dow Jones Newswires

October 24, 2017 17:26 ET (21:26 GMT)