Investors weren't quite sure what to think in advance of General Motors' (NYSE:GM) "Office Hours" presentation. It's a new series from Detroit's largest automaker with the intention of passing on valuable insight to investors outside of its quarterly earnings conference calls. There were a couple of slightly negative takeaways, but also a silver lining for investors -- here are the details.
Euro charge increases
One factor for investors to keep in mind as we approach the second-quarter conference call is that GM has met all the requirements to report on a discontinued operations basis for the second quarter, before returning to reporting continuing operations. More specifically, during the second quarter GM will report its Opel/Vauxhall and its European Finance company operations as a discontinued operation and report a single after-tax line item. This is important for investors because it'll be the first look at how we can expect GM to generate its profits moving forward, as its struggling European business will be separated.
Arguably the biggest takeaway for investors was the updated guidance for General Motors' special charge associated with the sale of its Opel/Vauxhall operations in Europe. Originally, management guided for a $4 billion charge, which was subsequently increased to $4.5 billion during the first quarter of 2017. Now GM expects the charge to be roughly $5.5 billion due to costs resulting from the sale, contract cancellation charges, and commitments to transitional service to PSA Group post-sale.
"The Opel/Vauxhall transaction, as we've discussed before, along with previous actions that we've taken with Chevrolet in Europe, with Russia manufacturing ... and exiting Russia, Australia manufacturing and our most recent announcements around India and South Africa, has significantly de-risked our business. It's improved capital allocation and, as I said earlier, will allow us to focus attention and resources on significant growth opportunities going forward," said Chief Financial Officer and Executive Vice President Chuck Stevens during the conference call with investors and analysts Monday.
If you hadn't heard...
Stop me if you've heard this before: The automotive industry is plateauing. If only we all had a nickel for each time we've heard that, we wouldn't need to invest for retirement. Unfortunately, General Motors made it pretty clear that sales may not even reach its previous guidance. Originally, GM anticipated that U.S. light-vehicle sales would check in around 17.55 million units for 2017, which would have essentially matched 2016's record year. Management is now backing off that estimate slightly and estimates light-vehicle sales in the "low" 17 million range.
GM isn't the only entity seeing the slower-than-anticipated trend. Barclays analyst Brian Johnson expects the seasonally adjusted annual rate of sales (SAAR) to check in around 16.5 million in June, which would be the fourth consecutive month below 17 million -- the slowest four-month stretch since 2014.
The silver lining
One of the most influential bear arguments against automakers, as the industry plateaus and demand cools, is the possibility that incentives will increase, which will quickly erode profits. That was an industrywide mistake in previous decades, and a mistake some investors feel will inevitably be repeated. So far, however, it appears automakers aren't willing to drive an incentive war.
During General Motors' conference call, Stevens noted that U.S. pricing has become very competitive during the first part of 2017 but, "It appears the industry is becoming a bit more rational." Essentially, Stevens is seeing signs that automakers aren't willing to erase profitability to maintain market share as demand begins to cool -- and that's a phenomenal silver lining, provided automakers continue that practice.