General Motors (GM 37.31, -2.17, -5.48%) slip on Wednesday
even though the company beat second quarter earnings expectations. Today’s move
in the stock appears to stem from the company’s lowered full year 2018 outlook
owing mostly to recent and significant increases in commodity costs and to the unfavorable
foreign exchange impact of the Argentine peso and Brazilian real, which have
negatively affected business expectations.
Now, the second quarter results were impressive in their own right. General Motors managed earnings of $1.81/share on revenues that were about where the Street had anticipated at $36.8 bln. Second-quarter U.S. sales and market share were driven by strong deliveries of trucks, SUVs, and crossovers. In China, record second-quarter equity income of $592 mln was driven by record sales, led by the Baojun and Cadillac brands.
In the United States, GM delivered more than 758,000 vehicles in the second quarter, up 4.6%, ahead of an industry increase of 2.2%. Market share rose 0.4 percentage points driven by strong truck, SUV, and all-new crossover sales. Additionally, GM reduced inventory levels by 193,000 year/year -- an 83-day supply compared to 105-day supply a year ago.
GM China delivered more than 858,000 vehicles in the second quarter. Deliveries in the first half of 2018 grew 4.4%, an all-time high for the period. Baojun and Cadillac achieved record sales in the second quarter, up 6% and 19% respectively. Chevrolet continued to post double-digit growth of 22%.
As mentioned, General Motors faced significant external challenges, including higher than expected commodity prices and currency devaluation in South America. The company has been taking actions to mitigate these headwinds, though management expects volatility to extend into the second half.
Specifically, as a result of said increases in commodity costs and unfavorable foreign exchange impact, the company revises its full-year outlook to the following:
- EPS diluted of approximately $5.14
- EPS diluted-adjusted of approximately $6 (down from $6.30-6.60)
- Auto Operating Cash Flow to approximately $11.5 bln
- Adjusted Auto Free Cash Flow to approximately $4 bln
Regarding earnings cadence, General Motors feels Q4 results
will be stronger than Q3 on a relative basis, as the company increased full
sized pickup truck production. Management also noted on the conference call
that it expects overall second half volume to be down.
On trade, General Motors management commented that it's important to modernize NAFTA and important for the auto industry to have the right NAFTA agreements.
It appears that the trade war President Donald Trump has brought on the auto industry – and on General Motors specifically -- has impacted earnings. Announced tariffs on steel and aluminum imports caused GM's raw materials costs to increase, and thus resulted an increase in the price of the finished product.