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Morningstar | GM's First Quarter Is Soft, but We See Improvement for the Rest of the Year

Compared with recent large positive earnings surprises from GM, the company did not have a stellar quarter, however, we don't see anything in the first-quarter results to merit changing our fair value estimate. Management said earlier this year that first quarter would be the weakest quarter of 2019 and unfavorable working capital timing, a shut down of the Texas full size SUV plant for retooling, a China slowdown impacting all automakers, and less than full production of the new generation pickup weighed on results. Adjusted automotive free cash burn worsened from the prior-year's quarter to $3.9 billion from $3.3 billion, despite about a $240 million reduction in capital expenditure. Adjusted diluted EPS of $1.41 was only down 1.4% but included a $0.31 gain for revaluing GM's stake in Lyft and in PSA Group warrants as part of GM's Opel/Vauxhall 2017 sale to the French automaker. Excluding this gain, GM would have missed consensus by a penny and this quality of earnings issue likely explains the stock's move down on April 30. Revenue declined 3.4% to $34.9 billion, slightly missing consensus of $35.2 billion.

GM North America adjusted EBIT fell 15.1% to $1.9 billion and total company adjusted EBIT declined by 11.5% to $2.3 billion. Lower volume from a less-than-complete pickup inventory and from GM exiting some car segments in North America plus SUV downtime could not be entirely offset by $300 million of pricing tailwinds. Still, we think it's a good sign that about $400 million in cost savings from restructuring, mostly in North America, helped keep cost headwinds neutral year over year and management reiterated its full-year EPS guidance of $6.50-$7.00 per adjusted diluted share. North American restructuring is expected to help profits by $2 billion to $2.5 billion in 2019. More product launches in China this year as well as continued ramp up of the new light duty truck make us optimistic on some good quarters coming, especially in second-half 2019.

The new generation pickup on the T1 platform went immediately after the lucrative crew cab segment where GM has lagged Ford. These new trucks are getting average transaction prices about $5,800 more than the prior generation crew cab according to J.D. Power data cited by GM. Full production of regular and double cab production began in March, so at some point in the second quarter GM's light duty pickups should be at full strength. Changeover for the new generation heavy duty trucks due to launch in the second half of 2019 will be a temporary drag on results, but earnings should improve considerably from first quarter as volumes increase on these new models. The T1 platform will also be used for the new generation full size SUVs, such as Chevrolet Tahoe and Cadillac Escalade, due out next year.

GM's Cruise autonomous vehicle subsidiary remains, per management, on track to launch its ride hailing service this year. The group is doubling its headcount this year to 2,000 people, and we look forward to hearing some updates later in 2019, as stated by CEO Mary Barra, because GM has been quiet about what the group is doing since a November 2017 analyst day. We want to hear if the group is really on target to launch this year and in what cities. We think San Francisco and Phoenix are the likely areas to start because that is where Cruise is doing its testing. It's unclear if Cruise ever entered New York last year as planned, and, given the silence, we suspect New York is on hold for either regulatory reasons or to best focus on a safe launch in San Francisco. We don't mind a delay if GM needs the time to make the service safe because an early high profile accident or fatality would severely damage GM's emerging tech industry credibility.

GM International including the Chinese joint ventures made $31 million in the quarter, down from $189 million in first-quarter 2018. Last year's Korea restructuring helped GMI excluding Chinese equity income improve adjusted EBIT by about $100 million, but for the whole segment, China's continued industry slowdown took a toll. GM China pays one dividend a year back to GM, usually in the spring, so the cash impact of this slowdown will not be felt until 2020 but first quarter China equity income declined by 37% to $376 million. GM cut first-quarter production by about 20%, which is appropriate because its first-quarter retail sales fell by 17.5%, with all brands taking a hit. Cadillac, for example, declined by 18.9% to 44,684 units, while Buick, GM China's second largest brand, declined by 17% to 225,313. We expect second-half improvement for GM China, just as we do for GM's global earnings, because of new product but we model GM's total automotive equity income declining 15% in 2019 from 2018 on China weakness. GM China will launch about 20 new and refreshed models this year, including its first vehicles from the global family platform to help bring more scale to emerging markets. Other China highlights this year include the Cadillac XT5 and XT6 crossovers in May and July, a new sedan, the recently unveiled CT5, later this year, and two new Buick Encore crossovers.