GM posted $9.4B net profit in 2016, but encore may be tough
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At an investors' conference during Detroit's auto show in January, confident General Motors executives told investors to expect improved pretax profits for 2016 and 2017, thanks to strong sales in key markets and cost cuts.
On Tuesday, the company partly delivered, reporting a 16 percent increase in last year's pretax income. An encore could be a lot harder.
Overall auto sales are flattening in the U.S., GM's biggest profit center, and car inventories are growing. Economic troubles linger in Europe and South America.
And a new U.S. president wants to redo the North American Free Trade Agreement and could slap a border tax on imports from Mexico.
All of these will make it hard for GM to beat last year's net income of $9.4 billion.
Financial analysts say GM has big advantages over most competitors with a larger presence in China and newer products, especially in profitable trucks and SUVs that are becoming increasingly popular with U.S. and global buyers.
But Barclays analyst Brian Johnson says GM is at risk should President Donald Trump impose a 20 percent tax on vehicles imported from south of the border.
About 20 percent of GM's North American production is in Mexico, higher than both its Detroit rivals, Johnson wrote in a recent note to investors.
Plus, 42 percent of GM's Silverado and Sierra pickup trucks, which are two of the company's highest-revenue vehicles, are made at a plant in Silao, Mexico, and could be hit by a tax, Johnson wrote.
From left, General Motors Chairman and CEO Mary Barra, President Dan Ammann and Executive Vice President and Chief Financial Officer Chuck Stevens speak about the financial outlook of the automaker in Detroit.
GM executives said Tuesday that it's too early to tell exactly what will happen with a border tax. CEO Mary Barra, a member of Trump's council of business leaders, said she has explained the complexity of the auto industry to the president, detailing its long decision-making times for picking parts suppliers and locating factories. "If there are shifts, they have to happen over time," she said.
Still, the uncertainty pushed GM's shares down $1.80, or 4.9 percent, to $35.03 in midday trading Tuesday.
GM's full-year net profit fell just under 3 percent, but it reported a record pretax profit of $12 billion in North America. That means big checks for most of the 52,000 union workers, who will get $12,000 each, costing the company $624 million. That's up from $11,000 last year.
GM said Tuesday that it made $6 per share for the year. Without special items it made $6.12, beating Wall Street expectations by a dime, according to a survey by FactSet.
Despite looming issues, GM estimates it will earn a pretax profit this year in a range from $6 to $6.50 per share. Johnson wrote that he's "somewhat skeptical" of GM's full-year guidance.
Edward Jones analyst Jeff Windau gives GM shares a "hold" rating but also thinks the company's optimism for 2017 is justified. GM, he said, is on track to cut costs by $6.5 billion per year by 2018, over 2014 levels. Although the company is spending heavily on new technology such as electric and autonomous cars, it's also making a lot of money as consumers shift from cars to trucks. Services such as OnStar and GM's financial unit also will add to profits, he said.
"Those all kind of balance some of the pressures that we see coming into this year," Windau said.
Chief Financial Officer Chuck Stevens said the company is benefiting from strong sales of higher-priced trucks and crossover SUVs. Since cars are selling slowly amid demand for SUVs, Stevens said GM will shift capital spending toward SUVs and trucks.
"We are allocating more capital to growth and profit pools where we think we can earn a long-term return," he said.
Sales of cars in the U.S. are slowing as buyers shift to SUVs, which works to GM's advantage. Car sales accounted for only 37 percent of the market in January, when they were nearly 50 percent just two years ago.
At the end of January, GM had enough cars on dealer lots to supply them for 131 days. Normally automakers like to have around a 60-day supply. Stevens said if the car slump continues, GM will further adjust factory production to match it, meaning there could be more layoffs at car factories.