General Motors (NYSE: GM) won't release its complete fourth-quarter and full-year 2018 earnings report until Feb. 6. But in a briefing for analysts last Friday, CFO Dhivya Suryadevara said that GM did better than expected in 2018 -- and it expects to do even better in 2019.
GM's 2018 EPS: Better than it thought
As recently as October, Suryadevara had given fairly conservative guidance for the full year. GM's adjusted earnings per share, she said, would come in "around $6.00," and its adjusted automotive free cash flow would be "around $4 billion." (She later clarified the guidance for adjusted earnings per share, saying that it would fall in a range between $5.80 and $6.20.)
Sales of the Chevrolet Equinox crossover rose 26.4% in the fourth quarter, helping GM's earnings per share to come in higher than expected. Image source: General Motors.
The bad news was that both of those reflected declines from 2017, when GM's adjusted earnings per share hit $6.62 and its adjusted automotive free cash flow was $5.2 billion. ("Adjusted" figures exclude the effects of one-time items; "automotive" figures exclude results related to subsidiaries GM Financial and Cruise Automation.)
But the good news, Suryadevara said last week, is that the company did somewhat better than it had expected. While GM's results weren't yet final, she said she expected adjusted earnings per share to "exceed the high end of the range" and adjusted automotive free cash flow to be higher than $4 billion.
Misses to the upside aren't bad, but how did GM blow past its own guidance? "Strength across every operating segment" in the fourth quarter. The automaker finished strong in both the U.S. and China in the fourth quarter, despite the slumping Chinese market, and GM Financial also performed well, Suryadevara said.
GM's guidance for 2019: The future is bright
Suryadevara said that GM expects that strong performance to continue in 2019. But, she said, the company's ability to generate profits will face both "headwinds and tailwinds" in 2019.
"Tailwinds" (things that will help boost earnings):
- A full year to benefit from the brand-new full-size pickups (the Chevrolet Silverado and GMC Sierra) that GM launched late in 2018. (Generally speaking, new products sell better and generate better margins than older products.)
- Continued strength from the revamped lineup of crossover SUVs that the company has launched over the last few years, including the new Cadillac XT4 and XT6 luxury crossovers.
- Growth in "adjacencies," GM-speak for profit centers "adjacent" to the core auto business, such as its subscription-based OnStar connected-vehicle service.
- Cost savings from the restructuring that GM announced in November. Suryadevara expects between $2 billion and $2.5 billion of the total $4.5 billion in savings to be realized in 2019.
GM said the brand-new 2019 Chevrolet Silverado will be one of several "tailwinds" boosting its earnings per share in 2019. Image source: General Motors.
Against that are some "headwinds," or things that will tend to reduce profits:
- High prices for key commodities, because of tariffs, and the potential for new, additional tariffs.
- Factory downtime ahead of the launch of GM's all-new big SUVs -- the Chevrolet Tahoe and Suburban, GMC Yukon, and Cadillac Escalade -- to retool the assembly lines for the new vehicles. (That will limit supplies of the outgoing models, which are still very profitable.)
- China. GM's sales in China fell 25.4% in the fourth quarter of 2018, as the broader market for new vehicles in China slipped sharply for the first time in years. The company is planning to launch a bunch of new models in China this year, but the overall market could be a significant headwind.
The upshot of all that? Suryadevara said that despite the headwinds, GM believes the tailwinds will make 2019 a good year: The company expects its 2019 adjusted earnings per share to come in between $6.50 and $7.00, with adjusted automotive free cash flow between $4.5 billion and $6 billion.
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