7 Million GM Recalls Seen Eroding Profit Under CEO Barra

This was supposed to be the year when General Motors Co. (GM) made a record $10 billion in profit.

Now, new Chief Executive Officer Mary Barra will be hard pressed to avoid posting a loss when GM announces its first-quarter earnings tomorrow. The cost of recalling 2.59 million vehicles linked to the deaths of at least 13 people -- combined with continued losses in Europe and new challenges in Russia, Australia, Asia and South America -- have prompted analysts to downgrade their earnings estimates.

“It’s certainly been a trying 100 days” since Barra started on Jan. 15, said Brian Johnson, an industry analyst with Barclays Plc. This week, Johnson lowered his earnings estimate to a penny-per-share loss from a 20-cent profit. He predicted that the company would have its worst results since the fourth quarter of 2009, when GM was fresh from its U.S. government-backed bankruptcy reorganization.

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Over the past four weeks, all 11 analysts surveyed by Bloomberg lowered their estimates for GM’s first-quarter adjusted EPS, bringing the consensus estimate down 92 percent, to 4 cents a share. Detroit-based GM reported an adjusted 67 cent per share profit a year earlier.

A year ago, GM reported a net first-quarter profit of $1.18 billion. This quarter, it has forecast taking a $1.3 billion loss for costs related to recalling 7 million vehicles, including those with faulty ignition switches. It has also said it will take a $400 million pretax charge for changes in Venezuela’s currency. That will come on top of any losses in Europe, which have totaled more than $18 billion since 1999.

Photographer: Pete Marovich/Bloomberg

General Motors Co.'s new Chief Executive Officer Mary Barra will be hard pressed to avoid posting a loss when GM announces its first- quarter earnings tomorrow. Close

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Photographer: Pete Marovich/Bloomberg

General Motors Co.'s new Chief Executive Officer Mary Barra will be hard pressed to avoid posting a loss when GM announces its first- quarter earnings tomorrow.

‘Kitchen Sink’

In addition, Johnson estimated GM will have restructuring costs in Asia and South America. “We continue to expect a ‘kitchen sink’ quarter for GM,” he told investors in a note.

As recently as two years ago, analysts estimated that GM’s 2014 adjusted income would exceed $10 billion. That average slid to $7.93 billion during December, when GM announced Dan Akerson would retire early as CEO and be succeeded by Barra. Now, the full-year estimate of 13 analysts surveyed by Bloomberg averages $5.54 billion. GM’s biggest calendar-year profit was $9.19 billion in 2011.

The original optimism, coming after the reorganized GM’s 2010 initial public offering, was based largely on the belief that the company’s U.S. market share would rise, its costs in North America would be lower, and its operations in Europe and South America would be doing better, Adam Jonas, an analyst with Morgan Stanley, said in a telephone interview.

‘Country Mile’

“Since the IPO, GM has executed well in many areas, but overall nowhere near as strong as our admittedly high expectations,” Jonas wrote in a note to investors in October. “There’s just no other way to put it -- we were off by a country mile.”

Optimism for GM had been building for the past year after the U.S. Treasury began unwinding its ownership stake in the automaker, one of the last vestiges of the $50 billion U.S. government bailout and 2009 bankruptcy reorganization.

Even before the recall, GM was trying to lower expectations for the year. In January, the company said it expected adjusted earnings before interest and taxes to improve “modestly” this year as improved performance in the U.S. and China would be largely offset by $1.1 billion in restructuring costs. Adjusted Ebit would be softer in the first quarter because of losses associated with currencies and costs to roll out new trucks, executives said.

Millions Recalled

Then, on Feb. 13, the company began recalling vehicles with faulty ignition switches. GM has also recalled vehicles with unrelated flaws, bringing its total to almost 7 million recalled vehicles during the first quarter.

Congress, federal regulators and the U.S. Justice Department are all investigating why it took the automaker more than a decade to recall cars with faulty ignition switches that allowed the key to slip out of the “on” position, shutting off the engine and disabling air bags.

When the company expanded its estimated recall costs to $1.3 billion from $750 million, on April 10, it said it expected “solid core operating performance in the first quarter financial results.”

GM global sales figures released last week suggested some bright spots. In China, the company’s largest market by volume, deliveries rose 13 percent in the first quarter, and in Europe, they rose 0.7 percent. Those gains helped GM post a 2.3 percent sales increase during the quarter globally, offsetting declines in the U.S. and Brazil, GM’s second- and third-largest markets by volume, respectively.

Progress ‘Overshadowed’

In a speech last week in advance of the New York auto show, Barra focused on China and other areas of success. GM boosted its average transaction prices on new vehicles in the U.S. by $3,800 in March, she said.

“I think it’s fair to say that much of the progress we have made in the last two months has been overshadowed by the intensity of the recall coverage -- but in fact there has been a lot of good news to report,” Barra said.

She was mobbed afterward by dozens of reporters questioning her about the recall.

Analysts, such as Itay Michaeli of Citigroup Inc., said they expect to see GM report continued losses in Europe, perhaps larger than a year earlier, as the company works to close an assembly plant in Germany -- a first in the country since World War II. Excluding China, GM’s international operations, which essentially include everything outside of the Americas and Europe, may lose about $700 million, Michaeli said.

Michaeli remains bullish on GM’s North America operations, estimating that higher sales prices from the company’s new pickup trucks could translate into earnings for the region of about $2.3 billion before interest, taxes and recall costs.

“The key question for investors will be how did GM perform in the quarter outside of the big recall charges,” Michaeli said.

To contact the reporter on this story: Tim Higgins in Southfield, Michigan, at thiggins21@bloomberg.net

To contact the editors responsible for this story: Jamie Butters at jbutters@bloomberg.net Niamh Ring

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