General Motors' (GM +5.47%) chief financial officer said that the auto giant is on track for a "very strong year" in 2017, despite some challenges it hadn't anticipated when it issued its guidance for the year in January. "Overall, we expect a more challenging environment across a number of dimensions [in 2017]," CFO Chuck Stevens said during a briefing for Wall Street analysts on Thursday.
But despite the shifting headwinds, Stevens said that GM's original guidance for 2017 "remains firmly in place." GM expects a very profitable year, thanks, in large part, to some important new products.
The all-new 2018 Chevrolet Traverse is just one of several completely new GM crossover SUVs coming to market in 2017. GM hopes they'll boost sales and profit margins. Image source: General Motors.
New challenges for GM since the beginning of the year
Stevens said that three factors were making for a more challenging environment than GM had expected when it issued that guidance three months ago:
- Rising interest rates. Many car buyers focus on the size of their monthly payments. With interest rates low, buyers have opted for more upscale or well-optioned models, pushing average transaction prices -- and GM's profit margins -- upward. All else being equal, higher interest rates will raise those payments. That could reduce the amount that buyers will be wiling to spend on their vehicles, denting GM's profitability.
- Falling used-car prices. Because of the boom in new-car leasing that began a few years ago, more used cars are coming into the market now. That's pushed prices downward faster than GM expected. Lower used-car values reduce the amount that GM's financial unit can recover at the end of a lease, trimming what GM had hoped would be a source of increasing profitability in 2017. Stevens said that GM expects the prices of used cars in GM Financial's leasing portfolio to fall about 7% in 2017, and possibly another 3% next year.
- South America. GM had anticipated an economic recovery in Brazil, where a deep recession has clobbered new-car sales for the past several quarters. But while there were some good signs late in the first quarter, that recovery isn't materializing quite as rapidly as GM had anticipated at the beginning of the year.
Those are offset by a big piece of positive news. Stevens said that GM's cost-reduction efforts are running ahead of its own targets.
GM had originally planned to reduce its annual costs by $4.7 billion between 2015 and the end of 2017, largely by taking better advantage of the economies available because of its vast global scale. But it's ahead of plan: Stevens said GM is now targeting $5.5 billion of cost savings through the end of this year.
"Overall, we are very much on track to deliver the performance we outlined in January," Stevens said.
GM still expects a strong profit in 2017
Here's what GM said in January about the results it expects for the full year in 2017:
- Revenue will be higher than the $166.4 billion it generated in 2016.
- Earnings before interest and taxes (EBIT)-adjusted earnings and profit margin will be about the same as the $12.5 billion and 7.5% it posted last year.
- Free cash flow will be around $6 billion for the full year, down a bit from the $6.9 billion it generated in 2016.
- Earnings per share will rise to between $6.00 and $6.50 from last year's $6.00, despite the flat EBIT-adjusted earnings, thanks to an ongoing share-repurchase program.
That's a more upbeat forecast than we've seen from some of GM's competitors. Old rival Ford Motor Company (F +5.73%) is anticipating a profit decline in 2017 on rising costs and aggressive investments in new technology. And it's not alone. But with one quarter of 2017 in the books, GM remains confident that it will deliver.
