GM Profit May Be ‘Pinched’ by New-Model Costs That Stung Ford
GM Profit May Be ‘Pinched’ by New-Model Costs
Jeff Kowalsky/Bloomberg
GM's fourth-quarter net income may be $1.06 billion, the average of seven analysts’ estimates compiled by Bloomberg.
GM's fourth-quarter net income may be $1.06 billion, the average of seven analysts’ estimates compiled by Bloomberg. Photographer: Jeff Kowalsky/Bloomberg
General Motors CEO Dan Akerson
Andrew Harrer/Bloomberg
Dan Akerson, chief executive officer of General Motors Co. (GM), speaks during the Chevrolet Sonic unveiling at the North American International Auto Show (NAIAS) in Detroit.
Dan Akerson, chief executive officer of General Motors Co. (GM), speaks during the Chevrolet Sonic unveiling at the North American International Auto Show (NAIAS) in Detroit. Photographer: Andrew Harrer/Bloomberg
General Motors Co., the largest U.S. automaker, may report its smallest quarterly profit in a year as costs for developing and introducing new vehicles rise.
Fourth-quarter net income may be $1.06 billion, the average of seven analysts’ estimates compiled by Bloomberg. The profit would be GM’s second-weakest quarter since emerging from bankruptcy in July 2009, better than only its $3.22 billion loss a year earlier.
Chief Executive Officer Dan Akerson is demanding speedier introductions of new models as the automaker revamps a lineup that is older than rivals such as Ford Motor Co. GM’s spending on cars including the Chevrolet Volt plug-in hybrid and future products may lead to higher costs similar to those that restrained profits at Ford and Daimler AG.
“Both Daimler and Ford got pinched quite a bit in their fourth quarter due to higher launch costs,” David Whiston, an equity analyst at Morningstar Inc. in Chicago, said in a telephone interview. “I suspect we’re going to see something similar at GM.”
The quarter still may be enough for GM’s largest annual profit, excluding gains recorded when it emerged from bankruptcy in 2009, since its predecessor earned $6 billion in 1999. Net income in 2010 may be $5.38 billion, the average of five analysts’ estimates.
Fourth-quarter earnings will be lower than in earlier periods last year partly because of higher engineering spending, Chief Financial Officer Chris Liddell said in an interview last month. The Chevrolet Cruze small car began sales in the quarter, and Akerson has said he wants the Volt’s gasoline-electric drive system used in more models.
Higher Costs
Automakers are paying more for materials such as steel and are struggling to pass the costs to consumers amid a “somewhat weak” economy, said Nicholas Colas, chief market strategist at BNY ConvergEx Group in New York.
Ford, the second-largest U.S. automaker, said last month that fourth-quarter profit tumbled as new models drove higher costs, sending the Dearborn, Michigan-based automaker’s shares down the most in more than 20 months. The profit margin for Stuttgart, Germany-based Daimler’s Mercedes-Benz unit narrowed to 8.3 percent in the fourth quarter from 9.5 percent in the previous three months as development spending rose 15 percent.
GM’s ability to generate cash and its presence in China should offset those costs over time, said Dan Veru, chief investment officer at Palisade Capital Management LLC in Fort Lee, New Jersey. GM has said its cash flow could reach as much as $16 billion annually.
‘Mindset Has Changed’
“The mindset has changed, and they are investing for the long run,” said Veru, who helps oversee $3.5 billion, including GM preferred shares. “There is a universe of investors that is going to find that quite appealing.”
GM has risen 8.4 percent in New York Stock Exchange composite trading since it sold $23.1 billion in common and preferred stock in November. The shares fell 74 cents, or 2 percent, to $35.77 yesterday.
Revenue in 2010 may have climbed 27 percent to $133.3 billion, the average of 12 estimates. Sales were $104.6 billion in 2009, down from $205.6 billion in 2006, when GM had twice as many U.S. brands.
GM lost 0.7 percentage point of U.S. market share from 2009, when it closed Hummer, Pontiac and Saturn and sold Saab, according to Autodata Corp. in Woodcliff Lake, New Jersey. Filling the void are the Chevrolet Equinox, Cadillac SRX and GMC Acadia sport-utility vehicles, and the Buick Lacrosse sedan.
GM Incentives
GM updated models representing 14 percent of sales in 2010, trailing the 26 percent rate for Ford, Chris Ceraso, an analyst for Credit Suisse Group AG, wrote in a report last year. GM’s refresh rate will fall to 12 percent this year, compared with 19 percent for Ford, according to Credit Suisse.
The shortage of new models coming to the U.S. this year may require GM to spend more on discounts and sales incentives than rivals, said Jessica Caldwell, an analyst at Edmunds.com, a Santa Monica, California-based consumer auto-pricing website.
“That’s something you’re going to have to do when you have old product and you’re selling in the face of competitors coming out with new product,” Caldwell said.
GM increased spending on incentives by 16 percent in January, while Ford, Chrysler Group LLC and Nissan Motor Co. reduced them, according to researcher Autodata Corp. in Woodcliff Lake, New Jersey.
GM started a promotion this month offering to waive payments on existing leases if holders buy a new car, and the automaker is offering cash of as much as $7,000 on some Cadillac models this month, according to Edmunds.
GM’s incentives in 2010 fell 5.5 percent to $3,393 per vehicle sold, a bigger drop than the industry’s 2.1 percent decline, according to Autodata.
Europe Restructuring
GM’s operations in Europe, its only unprofitable region, are expected to lose money through 2011, Akerson, 62, has said. The automaker needs a turnaround there similar to what was achieved in the U.S., said Stephen Girsky, GM’s vice chairman.
“It’s a little tougher to do over there, given the excess capacity across Europe, but it can be done,” Girsky said during a Feb. 15 conference with analysts in New York.
GM had $82 billion in losses from 2005 to 2008 before tumbling into bankruptcy in 2009. The company had a $127.1 billion net income in the third quarter of 2009, when it accounted for its recapitalization after bankruptcy.
To contact the reporter on this story: Craig Trudell in Detroit at ctrudell1@bloomberg.net
To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net
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