Despite the Recall Mess, GM Ups Its Guidance

GM's CEO says the company may have a bigger profit than expected -- not counting the recall costs.

Jun 23, 2014 at 11:31AM

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Despite the ongoing fallout from a long-delayed recall of the Chevrolet Cobalt and other GM compacts made last decade, GM says it may make more money than expected in 2014. Source: General Motors Co.

How hard is the recall scandal hitting General Motors' (NYSE:GM) bottom line?

Not as hard as you might think. While the automaker did take a $1.3 billion charge for costs related to its recalls in the first quarter, and it has said that there will be more charges in the second quarter, its sales and profits appear to be on track.

Or maybe even better than on track. As Motley Fool senior auto specialist John Rosevear explains in this video, it went unnoticed by some investors, but GM CEO Mary Barra and CFO Chuck Stephens actually raised GM's 2014 guidance a couple of weeks ago -- with an important caveat.

A transcript of the video is below.

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John Rosevear: Hey Fools, it's John Rosevear, senior auto specialist for Fool.com. There has been a whole lot of news about General Motors last week, most of it about the seemingly endless series of recalls they've been conducting, and the fact that some of them are many years overdue.

But there was some other GM news you might have missed. A couple of weeks ago, CEO Mary Barra held a conference call for investment analysts to talk about the ramifications of the recall scandal from a business perspective, and some really interesting stuff came out of that call.

For starters, she said GM may beat its previous profit guidance for 2014. Earlier in the year, GM said it expected its 2014 earnings before interest and taxes to be a little bit better than the $8.6 billion it earned on the same basis last year. Barra said GM was running on pace or ahead of pace for all of the things that went into that guidance, and so the company might do a bit better than they'd expected, despite all of the harsh publicity GM has been facing this year.

Of course, that guidance comes with a big big asterisk, and that's that they're excluding recall-related costs when they say that. So far this year, GM has announced over 40 different recalls in North America, affecting roughly 20 million vehicles -- and again, those are the current totals as I'm recording this; there might be more by the time you watch. And those recalls have been expensive.

GM took a $1.3 billion charge related to recall-related costs in the first quarter, and they've already told us that there will be around $400 million more in the second quarter. Again, that's a number that could go up between now and the end of June, too.

Barra and CFO Chuck Stephens also raised another bit of GM guidance on that call, and that's the expectations for GM's turnaround in Europe. GM, of course, has lost a fortune in Europe, but it has been working on an aggressive restructuring plan that has shown real signs of progress, and there may be even more progress happening than we've thought.

We've been hearing from GM executives for a while now that GM's goal has been to get to break-even in Europe by "mid decade," and they've sometimes even said "break even on an operating basis," meaning without taking taxes and interest into account, but now they're saying they expect to be profitable by mid-decade.

Of course, there's still some wiggle room in what they mean by "mid-decade," but looking a little further out, Barra threw out some real numbers. She said GM is aiming at having 8% market share in Europe and a 5% operating margin, pre-tax profit margin, by 2022. That's up from a 5.8% market share in 2013, and of course they haven't had any profits at all in Europe in over 10 years.

So, let's hope they're on plan, here. I think GM's new CEO deserves to have something in the company going well for her. Thanks for watching.

John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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