General Motors (GM 1.35%) will report its third-quarter earnings results before the U.S. markets open on Tuesday, and -- at least when it comes to the headline numbers -- the results are likely to be quite a bit lower than the automaker has posted in recent periods.
But the thing investors need to recognize is that the factors causing those drop aren't surprises, nor should they be major concerns for shareholders. Here's a look at what to expect.
What are Wall Street's expectations?
Wall Street thinks that GM's revenue and earnings will both be down significantly from its results in the third quarter of 2016. Wall Street analysts polled by Thomson Reuters expect GM's earnings, excluding special items, to come in at $1.13 per share on $32.67 billion in revenue. A year ago, GM earned $1.76 per share on revenue of $42.8 billion.
Whoa, Wall Street expects a big decline. That's bad, right?
Yes and no. There are a couple of factors at work here.
First, new car sales have been slowing domestically, and GM's inventories had been swelling until recently. As of June 30, the end of the second quarter, GM had 105 days' worth of inventory at its dealers. That's very high. For most models, analysts like to see around 60 days' worth of inventory. While GM's sales were up slightly (0.9%) in Q3, that wouldn't have been nearly enough to clear out its bloated inventories if its factories had kept producing vehicles at the same rate.
But GM managed to get its U.S. inventory down to just 76 days' worth as of Sept. 30, the day Q3 ended. How? By idling several factories:
- Its Fairfax Assembly, which builds the midsize Chevrolet Malibu sedan, shut down for five weeks starting in late June.
- The Lordstown Complex, which builds the compact Chevrolet Cruze, was shut down for three weeks in July and another three weeks in September and October.
- The Bowling Green Assembly, which builds the Chevrolet Corvette sports car, has been shut down since July 28.
Other GM plants cut production during the third quarter, including:
- The CAMI Assembly plant in Ontario, Canada, which builds the hot-selling Chevrolet Equinox, was shut down for two weeks in September (and two more in October) due to a strike by factory workers.
- The Orion Assembly, which builds the subcompact Chevrolet Sonic and all-electric Chevrolet Bolt, wasn't shut down, but production was changed in July to build fewer Sonics. (Production of the Bolt wasn't cut.)
Why does all that matter? Like most automakers, GM books revenue when it ships vehicles to dealers. Even though its U.S. sales were up slightly in Q3 compared to a year ago, it almost certainly shipped a lot fewer vehicles this year than it did then.
The upshot: A big year-over-year drop in revenue in GM's most important regional market, North America. (And a drop in net profit, too.)
There's more: A huge one-time charge related to the Opel sale
GM's sale of its German subsidiary, Adam Opel AG, to French automaker Peugeot SA (PUGOY) closed on Aug. 1. Back in July, GM warned us that the sale's closing would trigger a huge one-time charge against earnings, which it estimated would be between $5.5 billion and $6 billion.
The big thing for GM shareholders to understand is that most of that consists of accounting charges that won't cut into GM's cash. A lot of it, about $3.9 billion, is related to the loss of deferred tax assets. These are essentially unused tax credits that date back several years to when GM was posting huge losses, that GM has been carrying as assets on its balance sheet. Because it sold Opel to Peugeot, the credits that apply to that portion of GM's (former) business either go away or go to Peugeot.
Much of the remainder, about $1.6 billion, is related to Opel's pensions. Part of that is an accounting charge, but some is real money: Premiums that GM agreed to pay to Peugeot in exchange for Peugeot's agreement to assume some pension liabilities.
The upshot here: These charges won't affect GM's "adjusted" non-GAAP numbers, including the earnings per share number that analysts will compare to the $1.13 earnings estimate. But they'll affect the so-called "headline" numbers, GM's revenue and net profit, and not in a good way.
Long story short: GM's earnings may look bad, but look deeper
From a shareholder's perspective, here are the things to remember:
- None of these things are surprises;
- Factory shutdowns are never good news, but they're "good" for investors in the sense that they show GM is responding appropriately to the slumping market;
- Much of the huge one-time charge related to Opel is an accounting shuffle that didn't impact GM's cash.
Don't be surprised if GM's shares are down sharply in early trading after the earnings release as traders respond quickly to the headline numbers. But I will be surprised if the stock price doesn't recover quickly, assuming that there are no negative surprises: Aside from the things noted above, GM's underlying earnings story is likely to be pretty good.